Fairness, ambiguity, wage markups and disinflation costs

LUNARDELLI, ANDRE (2025): Fairness, ambiguity, wage markups and disinflation costs.

Abstract

The notion that much of the reduction in disinflation costs in recent decades is due to better anchoring converges with the proposition of Dow, Simonsen and Werlang's (1993) that part of the sacrifice ratios of poorly anchored economies may be caused by coordination problems, which they modeled as ambiguity. The present paper associates ambiguity in disinflation with fairness in the labor market, but modeling it without an effective reduction in effort, and with inflation persistence, thus presenting similarities with Driscoll and Holden (2004). Bayesian inference with North American data with the model shows that the pattern here associated with ambiguity and fairness was especially pronounced during the Volcker disinflation, had local peaks after the oil shocks during the great inflation, did not happen following the wave of adverse productivity shocks after Volcker's macroeconomic anchorage, nor did it happen in the disinflation immediately after the COVID-19 pandemic. To make this inference, this paper models wage markup shocks by including in them factors such as an ambiguity premium, in contrast with the format that restricts them solely to shocks in the elasticity of substitution between different kinds of labor. This provides an explanation for the results of some well-known works with evidence compatible with the idea that increases in the (wide concept of) wage markups were a major cause of the increase of the unemployment rate and of the decrease in output during the Volcker disinflation. The paper concludes by briefly discussing ambiguity in disinflations of high and moderate inflations under both inflation targeting and exchange rate anchors.

• Item Type: MPRA Paper
• Language: English
• Keywords: Disinflation, ambiguity, fairness, wage markups, sacrifice ratios, inflation persistence, Phillips curve, inflation targeting, Central Bank coordination of expectations.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J60 - General

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