TY - JOUR AU - Drazen,Allan AU - Hamermesh,Daniel S. TI - Inflation and Wage Dispersion JF - National Bureau of Economic Research Working Paper Series VL - No. 1811 PY - 1986 Y2 - 1986 DO - 10.3386/w1811 UR - http://www.nber.org/papers/w1811 L1 - http://www.nber.org/papers/w1811.pdf N1 - Author contact info: Allan Drazen Department of Economics University of Maryland College Park, MD 20742 Tel: 301/405-3477 Fax: 301/405-7835 E-Mail: drazen@econ.umd.edu Daniel S. Hamermesh Department of Economics Barnard College 3009 Broadway New York, NY 10027 E-Mail: hamermes@eco.utexas.edu AB - A large body of empirical work has demonstrated that higher inflation, especially when it is unexpected, leads to greater dispersion in the distribution of price changes across subaggregates. A sparse and more recent literature suggests exactly the opposite effects on the distribution of wage changes. This study first reconciles these apparently opposite results using a model in which shocks to the economy can affect both wages and prices and the demand for indexing. If the positive effect of shocks on the demand for indexing is sufficiently large, the dispersion of changes in wages or prices will be reduced even though the shocks' direct effect is to increase this dispersion. Implicitly from the evidence, this offset is large enough in wage-setting, but not so large in price determination. Additional evidence on the relationship between inflation and the dispersion of wage changes is provided by empirical work for 14 Israeli manufacturing industries, 1956-82. The results suggest that in Israel, just as in the United States (on which previous work has been conducted) with its much less rapid and variable inflation, dispersion also decreased with unexpected price inflation. ER -