Identifying inflation's grease and sand effects in the labor market
By: Erica L. Groshen and Mark E. Schweitzer.
Contributors: Schweitzer, Mark E. 1964-; Federal Reserve Bank of New York.
Series: Staff reports ;; no. 31; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 31.
Publisher: Federal Reserve Bank of New York
Published: 1997
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Subjects: Labor market -- Effect of inflation on -- Middle West -- Econometric models.; Prices -- Effect of inflation on -- Middle West -- Econometric models.; Inflation (Finance) -- Middle West -- Econometric models.; Wages -- Effect of inflation on -- Middle West -- Econometric models.
Description: "Inflation has been accused of causing distortionary prices 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 employer's 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 is beneficial but statistically indistinguishable from zero.  It turns detrimental after that.  When positive, net benefits never exceed a tenth of gross benefits"--Federal Reserve Bank of New York web site.
Notes: Includes bibliographical references.
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