The Interaction of Labor Markets and Inflation

The adoption of explicit or implicit inflation targets by many central banks, and the low stable rates of inflation that have ensued, raise the question of how inflation affects market efficiency. The goal of the International Wage Flexibility Project (IWFP) —a consortium of over forty researchers with access to micro level earnings data for 16 countries—is to provide microeconomic evidence on the costs and benefits of inflation in the labor market. The results are intended to inform researchers as well as monetary and regulatory policymakers who are interested in labor markets or the impact of inflation. We study three market imperfections that may cause the rate of inflation to affect labor market efficiency.


The International Wage Flexibility Project

William Dickens and Erica Groshen are co-directors of the International Wage Flexibility Project — a multi-country study using data on individual wages and incomes to study the effects of inflation on wage setting and to determine the nature, extent, causes and consequences of several kinds of wage rigidity. The aim of the project is to improve monetary policy and the regulation of labor market institutions in all countries.

The project has received considerable support from the European Central Bank (www.ecb.int), the IZA (www.IZA.org), the Volkswagen Foundation (www.volkswagen-stiftung.de), and the New York Federal Reserve Bank (www.ny.frb.org). The project is being conducted by teams of researchers in 14 countries with results from the individual countries being aggregated for analysis by researchers at the New York Federal Reserve (Erica Groshen), the European Central Bank (Julian Messina, Jarkko Turunen, and Melanie Ward-Warmedinger), the Kansas City Federal Reserve (Mark Schweitzer), the University of Oslo (Steinar Holden), the University of Zurich (Lorenz Goette), and the Brookings Institution (William Dickens).

The initial findings of the International Wage Flexibility Project were published in How Wages Change: Results from the International Wage Flexibility Project which was published in the Journal of Economic Perspectives Spring 2007 issue. More recent findings are described in “The Interaction of Labor Markets and Inflation: Micro Evidence from the International Wage Flexibility Project” The methodology of the project is described in "Estimating Wage Rigidity for the International Wage Flexibility Project." The IWFP team has now begun work on a book on the results of the project.