A BEJM Contributions article.

Abstract

Inflation can “grease” the wheels of the labor market by relaxing downward wage rigidity but it can also increase uncertainty and have a negative “sand” effect. This paper studies the grease effect of inflation by looking at whether the interaction between inflation and labor market regulations affects how employment responds to changes in output. The results show that in industrial countries with highly regulated labor markets, the grease effect of inflation dominates the sand effect. In the case of developing countries, we rarely find a significant effect of inflation or labor market regulations and provide evidence indicating that this could be due to the presence of a large informal sector and limited enforcement of de jure labor market regulations.

Submitted: April 24, 2006 · Accepted: September 22, 2006 · Published: October 13, 2006

Originally published in Contributions to Macroeconomics.

Recommended Citation

Loboguerrero, Ana Maria and Panizza, Ugo (2006) "Does Inflation Grease the Wheels of the Labor Market?," Contributions to Macroeconomics: Vol. 6 : Iss. 1, Article 9.
Available at: http://www.bepress.com/bejm/contributions/vol6/iss1/art9