Identifying Inflation's Grease and Sand Effects in the Labor Market

50 Pages Posted: 6 Sep 2000 Last revised: 6 Oct 2010

See all articles by Erica L. Groshen

Erica L. Groshen

Federal Reserve Bank of New York; IZA Institute of Labor Economics

Mark Schweitzer

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: June 1997

Abstract

Inflation has been accused of causing distortionary price and wage fluctuations (sand) as well as lauded for facilitating adjustments to shocks when wages are rigid downwards (grease). This paper investigates whether these two effects can be distinguished from each other in a labor market by the following identification strategy: inflation-induced deviations among employers' mean wage changes represent unintended intramarket distortions (sand), while inflation-induced, inter-occupational wage changes reflect intended alignments with intermarket forces (grease). Using a unique 40-year panel of wage changes made by large mid-western employers, we find a wide variety of evidence to support the identification strategy. We also find some indications that occupational wages in large firms gained flexibility in the past four years. These results strongly support other findings that grease and sand effects exist, but also suggest that they offset each other in a welfare sense and in unemployment effects. Thus, at levels up to five percent, the net impact of inflation on unemployment is beneficial but statistically indistinguishable from zero. It turns detrimental after that. When positive, net benefits never exceed a tenth of gross benefits.

Suggested Citation

Groshen, Erica L. and Schweitzer, Mark, Identifying Inflation's Grease and Sand Effects in the Labor Market (June 1997). NBER Working Paper No. w6061, Available at SSRN: https://ssrn.com/abstract=226471

Erica L. Groshen (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7685 (Phone)

HOME PAGE: http://www.newyorkfed.org/research/economists/groshen/index.html

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Mark Schweitzer

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
18
Abstract Views
689
PlumX Metrics