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Results indicate higher nominal wage growth improves downward wage rigidity up to roughly 3-4% inflation, but also introduces disruptive wage variation that intensifies until about 7-10%, yielding smaller net benefits than grease-only estimates.",{"@graph":14,"@context":73},[15,34,56],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/document/","Document",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/document/research-report/","Research & 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question does the paper address about inflation and wages?","Question",{"text":63,"@type":64},"How inflation affects wage patterns in the labor market, with a focus on dispersion of wage changes rather than only employment or unemployment outcomes.","Answer",{"name":66,"@type":61,"acceptedAnswer":67},"What data does the paper use to study wage adjustments?",{"text":68,"@type":64},"A unique 40-year panel based on wage changes recorded by large mid-western employers, drawn from the Federal Reserve Bank of Cleveland Community Salary Survey (CSS) covering 1956 to 1996.",{"name":70,"@type":61,"acceptedAnswer":71},"What are the paper’s findings about the “grease” and “sand” effects of inflation?",{"text":72,"@type":64},"Higher inflation can improve relaxation of downward wage rigidity (“grease”) up to about 3-4%, but it also generates disruptive unintended wage variation (“sand”) that grows until inflation reaches roughly 7-10%, so net benefits peak at CPI levels around 2.5% and are far 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or Sand?  \nErica L. Groshen  \nFederal Reserve Bank of New York  \nMark E. Schweitzer  \nFederal Reserve Bank of Cleveland  \nThe authors thank Kristin Roberts for excellent and timely research assistance, and Larry Ball, Linda Bell, Daniel Hamermesh, Edward Montgomery, Joseph Ritter, and Eric SeveranceLossin for helpful comments and discussion. We also thank participants in workshops at Johns Hopkins University, Columbia University, the Federal Reserve Banks of Cleveland, New York and San Francisco, Lehigh University, American University, MacMaster University, the City University of New York Graduate Center, and Queens College.  \nABSTRACT  \nPrevious studies of whether inflation “greases the wheels” of the labor market ignore inflation’s potential for disrupting wage patterns in the same market. Using a unique 40-year panel of wage changes made by large mid-western employers, this paper 1) develops and applies an institutionally-based model of wage-setting that predicts the existence of independent occupational and employer adjustments embedded in wage changes, and 2) uses the model to draw inferences about inflation’s labor-market costs and benefits from adjustments in these two relative prices.  \nOur empirical results, whose robustness we explore, suggest that (consistent with some previous studies) higher nominal wage growth does add beneficial “grease” to relax downward wage rigidity. These potential benefits taper off after inflation rises to about 3-4 percent (allowing for 1 percent growth of labor productivity) . However, inflation also generates disruptive, unintended wage variations (“sand”), which continue to mount at least until inflation reaches rates of 7 to 10 percent. So, while inflation does appear to add grease, the net benefits of inflation peak at CPI levels of about 2.5 percent and are probably an order of magnitude less than previous grease-only benefit estimates. Thus, many fears about the impact of low inflation on labor markets are probably exaggerated.  \n“Higher prices or faster inflation can diminish involuntary, disequilibrium unemployment....The economy is in perpetual...disequilibrium even when it has settled into a stochastic macro-equlibrium....Price inflation...is a neutral method of making arbitrary money wage paths comform to the realities of productivity growth.”  \nJames Tobin,‘Inflation and Unemployment’, AEA Presidential Address (1972) .  \n“[Higher and more variable inflation causes: a] reduction in the capacity of the price system to guide economic activity; distortions in relative prices because of the introduction of greater friction, as it were, in all markets; and very likely, a higher recorded rate of unemployment.”  \nMilton Friedman,‘Inflation and Unemployment’, Nobel Lecture (1977) .  \n1. Introduction  \nHow does inflation affect the labor market? This question is of particular importance now, as rates of inflation decline globally and as more central banks adopt inflation targets. Indeed, the need for “grease” in the labor market is perhaps the most compelling argument against targeting very low levels of inflation (see Akerlof, Dickens, and Perry [1996] on the US, and Fortin [1996] on Canada) . This paper explores the effects of inflation on the dispersion of wage changes in order to inform the monetary policy debate and add to the previously distinct literatures on wage rigidity and inflation’s impact on relative price adjustments.  \nOne of this paper’s major strengths--the unusually tight link we forge between our analytic approach and common compensation adjustment practices--is made possible by the data set we study. The Federal Reserve Bank of Cleveland Community Salary Survey (CSS) offers detailed data on employers’ actual wage adjustments from 1956 to 1996. Because the purpose of the survey is to provide participating employers with information on market wage adjustments, it records wages a","cbCait6gXWb0pR2H","https://ap.wps.com/l/cbCait6gXWb0pR2H","pdf",228347,51,"English","# Introduction\n## Literature on the Effects of Inflation\n### \"Grease\" and \"Sand\" Defined\n# Conclusion and Policy Implications","[{\"question\":\"What main question does the paper address about inflation and wages?\",\"answer\":\"How inflation affects wage patterns in the labor market, with a focus on dispersion of wage changes rather than only employment or unemployment outcomes.\"},{\"question\":\"What data does the paper use to study wage adjustments?\",\"answer\":\"A unique 40-year panel based on wage changes recorded by large mid-western employers, drawn from the Federal Reserve Bank of Cleveland Community Salary Survey (CSS) covering 1956 to 1996.\"},{\"question\":\"What are the paper’s findings about the “grease” and “sand” effects of inflation?\",\"answer\":\"Higher inflation can improve relaxation of downward wage rigidity (“grease”) up to about 3-4%, but it also generates disruptive unintended wage variation (“sand”) that grows until inflation reaches roughly 7-10%, so net benefits peak at CPI levels around 2.5% and are far smaller than grease-only estimates.\"}]","The Effects of Inflation on Wage Adjustments in Firm-Level Data - Grease or Sand? | PDF",129]