High Inflation and Real Wages
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Summary:
Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.
Series:
Working Paper No. 2001/050
Subject:
Consumption Inflation Labor National accounts Poverty Prices Real wages
English
Publication Date:
May 1, 2001
ISBN/ISSN:
9781451846973/1018-5941
Stock No:
WPIEA0502001
Pages:
24
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