Why do workers dislike inflation? Wage erosion and conflict costs

Guerreiro, João, Hazell, Joe ORCID: 0009-0002-4930-7946, Lian, Chen and Patterson, Christina (2025) Why do workers dislike inflation? Wage erosion and conflict costs. Econometrica. ISSN 0012-9682 (In Press)

Text (draft_conflicts) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (7MB)

Abstract

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 around 1.75% of their wages to avoid conflict. Calibrating the model to survey data, we find that incorporating conflict significantly raises the costs of inflation for workers.

Item Type:	Article
Divisions:	Economics
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HB Economic Theory
Date Deposited:	18 Nov 2025 09:45
Last Modified:	20 Nov 2025 15:18
URI:	http://eprints.lse.ac.uk/id/eprint/130233

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