Nuremberg Research Seminar in Economics on 18 June 2025, Zoom (!!16:45!!)
You are invited to join the weekly Nuremberg Research Seminar in Economics on 18 June 2025 at 16:45 pm (!!). The seminar will be held via Zoom. Christina Patterson (University of Chicago) will be talking about “Why do workers dislike inflation? Wage Erosion and Conflict Costs”.
More information can be found here:
How costly is inflation to workers? Answers to this question have focused on the path of real wages during inflationary periods. We argue that workers must take costly actions (“conflict”) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises. We study a menu-cost style model, where workers choose whether to engage in conflict with employers to secure a wage increase. We show that, following a rise in inflation, wage catch-up resulting from more frequent conflict does not raise welfare. Instead, the impact of inflation on worker welfare is determined by what we call “wage erosion”—how inflation would lower real wages if workers’ conflict decisions did not respond to inflation. As a result, using observed wage growth to measure worker welfare understates the costs of inflation. We conduct a survey showing that workers are willing to sacrifice 1.75% of their wages to avoid conflict. Calibrating the model to survey data, incorporating conflict significantly raises the costs of inflation for workers.