When prices go up, workers surprisingly get more willing to take a pay cut.
Economic theory says inflation causes a 'wage-price spiral' where workers demand more money to keep up. In reality, the fear of losing their income entirely makes workers more desperate, leading them to sign long-term contracts for less pay just for the security.
The Puzzle of a Missing Wage-Price Spiral: Experimental Evidence on Inflation Expectations and Labor Supply
SSRN · 6446379
We study how workers form inflation expectations and incorporate them into labor supply decisions using experimental evidence from the U.S. online labor market. Exploiting exogenous variation from randomized information provision, we find that higher price inflation expectations do not raise reservation wages. Instead, workers lower reservation wages for multiperiod contracts, even after controlling for wage growth and unemployment expectations. These patterns are consistent with a labor search