Inflation is stressful

In their paper, “Why do workers dislike inflation? Wage erosion and conflict costs” (National Bureau of Economic Research, Working Paper 32956, September 2024), Joao Guerreiro, Jonathon Hazell, Chen Lian, and Christina Patterson do not dispute the real wage costs; however, they say that the costs of inflation go beyond its effect on real wages. They argue that workers must then take action and fight for raises, putting them in direct conflict with their firm and employer. Asking a supervisor for a raise, taking action with a union, or soliciting new job offers to get higher pay are stressful activities. This increased stress and anxiety is a “conflict cost” of inflation.

The authors define wage erosion as how real wages would have been affected had workers not engaged in conflict with their employer to get higher wages. Workers pay a nonmonetary cost, measured as conflict costs, to move from the eroded wage level to the new real wage level. The authors found that conflict costs more than doubled the cost of inflation on worker welfare.

The authors surveyed 3,000 workers at the beginning of 2024. To quantify conflict costs, the authors asked the respondents how wages were determined at their jobs in 2023: did these workers have to take action to ensure their nominal wages kept up with the postpandemic inflation? The authors also presented the respondents with hypothetical scenarios to test whether conflict rose with inflation.

The authors find that firms did not automatically increase wages to match inflation; therefore, conflict had an important role in securing higher wages. Workers fought to ensure their nominal wages kept up with inflation. The authors also confirm that conflict increased with inflation; the higher the rate of inflation, the more workers who engaged in conflict.

Workers who decided to engage in conflict did so because they believed conflict would raise their wages. Absent conflict, workers believe that for every 1.0-percentage point increase in inflation, there would be a 0.054-percentage point increase in a firm’s salary offering. In 2023, 79 percent of the respondents accepted their employer’s initial nominal raise and only 21 percent engaged in conflict to get a higher wage. Those who did not engage in conflict also believed that conflict would raise their wages by as much as 2 percentage points, yet they were averse to conflict and accepted their employer’s offer. Those who engaged in conflict had wage growth of 5.1 percent in 2023. Those who did not engage in conflict had wage growth of 3.1 percent. The authors found that the median worker would sacrifice a 1.75-percent wage increase to avoid conflict with an employer. Workers seemed so averse to conflict that more than 15 percent of respondents would give up a 4-percent increase in wages just to avoid conflict.

Guerreiro, Hazell, Lian, and Patterson show that measuring the welfare costs of inflation by inflation’s effect on real wages alone is insufficient and inaccurate. Instead, including conflict costs provides more insight on the effects of inflation on workers and their welfare.