Introduction

This paper examines a neglected economic phenomenon - the impact of inflation on the structure and inequality of wages. There is little evidence for the nonneutrality of inflation on income and earnings of individuals; however, the goal of lowering inflation rates seems to be the most important one in countries that experience even a moderate level of inflation. This goal, moreover, seems to be associated with a goal to improve income distribution².

Argentina offers a unique opportunity to study the consequences of inflation on the structure and inequality of wages. In the first half of 1989, Argentina experienced a hyperinflationary process. The rest of the year continued with some calm, until 1990 when high inflation hit again. This paper compares wage profiles from October 1987 and 1989 cross-sections of micro data. Between these two time periods Argentina experienced a major bout of hyperinflation, which peaked in July 1989 at 196.6% per month. The purpose of this research is: (1) to have a sense of what it means to analyze earnings profiles from a single cross-section in an economy subject to aggregate changes; (2) to study the possible non-neutrality of inflation among different individuals; and (3) to determine what type of optimal contracting model or informational story might produce results similar to the ones observed in this economy.

The Argentine case provides the researcher with exogenous shocks which are sufficiently sharp to be "natural experiments". Freeman (1989) proposes that this use of natural experiments should be one of the ways in which an empirical economist deals with the problems of nonexperimental social science. The huge variation in aggregate amounts at a point in time is the main "identification" tool used in this paper.