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August/September 1984, 
Vol. 66, No. 7
Posted 1984-08-01

The Impact of Inflation Uncertainty on the Labor Market

by A. Steven Holland

A. Steven Holland examines the effects of inflation uncertainty on the allocative efficiency of one particular market: the market for labor resources. The author shows that greater inflation uncertainty produces reduced employment and output growth, higher unemployment, and more complex wage negotiations. These results occur even though the labor market adapts over time to inflation uncertainty in ways that reduce its impact, specifically, by shortening the duration of labor contracts and increasing the prevalence of indexation. Furthermore, these labor market adaptations reduce both the short-run impact of monetary policy on output and the ability of the economy to adjust to real supply shocks (such as an energy crisis).