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| In a controlled laboratory experiment we study the impact of monetary instability on work relationships with incomplete contracts. We observe wage inertia i.e. the reluctance to fully adjust nominal wages to the changes in the value of the currency and effort inertia i.e. the reluctance to fully adjust the work effort to the alterations of the real wages. Under inflation these effects lead to cheaper labor and a shift of payoff shares to employers. Under deflation we observe a higher cost of labor and a shift of payoff shares to employees. Additionally inflation and deflation lower productivity and per capita earnings. |
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