INFLATION AND THE DISPERSION OF REAL WAGES* |
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| Authors: | Alok Kumar |
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| Institution: | 1. University of Victoria, Canada;2. I thank Merwan Engineer, Allen Head, Miguel Molico, David Scoones, Shouyong Shi, Randall Wright, and the participants of the Canadian Economic Association meeting 2002 at Calgary, the Macro workshop at Queen's University, Kingston, Mid‐West Macro Meeting 2003 at Chicago, Canadian Macro Study Group Meeting 2003, and EEA‐ESEM Meeting 2004, Madrid for their helpful comments. I also thank two anonymous referees of this journal for their numerous insightful comments, which led to considerable improvement in the article. The Social Sciences and Humanities Research Council of Canada provided financial support for this research. Please address correspondence to: Alok Kumar, Department of Economics, University of Victoria, Victoria, British Columbia, Canada V8W 2Y2. E‐mail: . |
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| Abstract: | The article studies the effects of inflation on real wage dispersion in a search‐monetary framework. The economy is characterized by frictions in both the goods and the labor markets. In the goods market, buyers and sellers bargain over prices, whereas in the labor market firms post wage offers. In equilibrium, a lower inflation rate increases the dispersion of real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980s and the 1990s in the United States and the empirical literature linking reduced inflation to greater wage dispersion. |
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