Inflation and Income Inequality: A Link Through the Job-Search Process

Abstract

In this paper I devise a new channel by means of which the (empirically documented) positive correlation between inflation and income inequality can be understood. Available empirical evidence reveals that inflation increases wage dispersion. For this reason, the higher the inflation rate, the higher turns out to be the benefit, for a worker, of making additional draws from the distribution of wages, before deciding whether to accept or reject a job offer. Assuming that some workers have less access to information (wage offers) than others, I show that the Gini coefficient of income distribution turns out to be an increasing function of the wage dispersion and, consequently, of the rate of inflation. Two examples are provided to illustrate the mechanism.

Keywords: Inflation, Inequality, Gini, Income Distribution, Search

JEL Classification: 30, E50, E60