The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Wage Indexation

  • Joshua Aizenman
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1322

Abstract

Wage indexation is a mechanism designed to adjust wages to information that cannot be foreseen when the wage contract is negotiated. A wage contract with indexation clauses will specify the wage base (that is, the money wage applicable in the absence of new information), the indexation formula that will be used to update wages, and how often updating will occur. Most traditional discussion has focused on wage indexation to the price level as a mechanism to stabilize real wages in the presence of inflation. More recently, however, attention has shifted to indexation to a wider set of indicators. These indicators include both richer price information (such as the value added price deflator and the terms of trade) and rules designed to index wages to indicators measuring the level of nominal activity (such as nominal GNP). Concurrently, growing attention has been given to the potential role of wage indexation in affecting the will and ability to reduce inflation.

Keywords

Consumer price index Contingency contracts Inflation Monetary policy rules Nominal wage contracts Rational expectation Staggered wage setting Wage flexibility Wage indexation 

JEL Classifications

J3 
This is a preview of subscription content, log in to check access.

Bibliography

  1. Aizenman, J. 1984. Optimal wage re-negotiation. Journal of Monetary Economics 13: 251–262.CrossRefGoogle Scholar
  2. Aizenman, J., and J.A. Frenkel. 1985. Optimal wage indexation, foreign exchange intervention, and monetary policy. American Economic Review 75: 402–423.Google Scholar
  3. Aizenman, J., and J.A. Frenkel. 1986. Supply shocks, wage indexation, and monetary accommodation. Journal of Money, Credit and Banking 18: 304–322.CrossRefGoogle Scholar
  4. Azariadis, C. 1978. Escalation clauses and the allocation of cyclical risks. Journal of Economic Theory 18 (1): 119–155.CrossRefGoogle Scholar
  5. Barro, R.J. 1977. Long-term contracting, sticky prices, and monetary policy. Journal of Monetary Economics 3: 305–316.CrossRefGoogle Scholar
  6. Blanchard, O.J. 1979. Wage indexation rules and the behavior of the economy. Journal of Political Economy 87: 798–815.CrossRefGoogle Scholar
  7. Brenner, R., and D. Patinkin. 1977. Indexation in Israel. In Inflation theory and anti-inflation policy, ed. E. Lunberg. London: Macmillan.Google Scholar
  8. Cukierman, A. 1980. The effects of wage indexation on macroeconomic fluctuations. Journal of Monetary Economics 6: 147–170.CrossRefGoogle Scholar
  9. Dornbusch, R., and M.H. Simonsen, eds. 1983. Inflation, debt and indexation. Cambridge, MA: MIT Press.Google Scholar
  10. Ehrenberg, R., L. Danziger, and G. San. 1983. Cost of living adjustment clauses in union contracts: A summary of results. Journal of Labor Economics 1: 215–245.CrossRefGoogle Scholar
  11. Fethke, G., and A. Policano. 1984. Wage contingencies, the pattern of negotiation and aggregate implications of alternative contract structure. Journal of Monetary Economics 14 (2): 151–170.CrossRefGoogle Scholar
  12. Fischer, S. 1977a. Wage indexation and macro-economic stability. In Stabilization of domestic and international economy, ed. K. Brunner and A.H. Meltzer. Journal of Monetary Economics, Supplementary 5, 107–147.Google Scholar
  13. Fischer, S. 1977b. Long term contracting, sticky prices, and monetary policy: A comment. Journal of Monetary Economics 3: 317–323.CrossRefGoogle Scholar
  14. Fischer, S. 1984. Real balances, the exchange rate and indexation: Real variables in disinflation, Working Paper No. 1497. Cambridge, MA: NBER.Google Scholar
  15. Flood, R.P., and N.P. Marion. 1982. The transmission of disturbances under alternative exchange-rate regimes with optimal indexing. Quarterly Journal of Economics 97: 43–66.CrossRefGoogle Scholar
  16. Friedman, M. 1974. Monetary correction. Washington, DC: American Enterprise Institute.Google Scholar
  17. Gray, J.A. 1976. Wage indexation: A macro-economic approach. Journal of Monetary Economics 2: 221–235.CrossRefGoogle Scholar
  18. Gray, J.A. 1978. On indexation and contract length. Journal of Political Economy 86: 1–18.CrossRefGoogle Scholar
  19. Karni, E. 1983. On optimal wage indexation. Journal of Political Economy 91: 282–292.CrossRefGoogle Scholar
  20. Keynes, J.M. 1936. The general theory of employment, interest and money. London: Macmillan.Google Scholar
  21. Kleiman, E. 1977. Monetary correction and indexation: The Brazilian and Israeli experience. Explorations in Economic Research 4 (1): 141–176.Google Scholar
  22. Marston, R.C., and J.S. Turnovsky. 1985. Imported material prices, wage policy, and macroeconomic stabilization. Canadian Journal of Economics 18: 273–284.CrossRefGoogle Scholar
  23. Sachs, J. 1983. Real wages and unemployment in the OECD countries. Brookings Papers on Economic Activity 1983 (1): 255–304.CrossRefGoogle Scholar
  24. Simonsen, M.H. 1983. Current theory and the Brazilian experience. In Inflation, debt, and indexation, ed. R. Dornbusch and M.H. Simonsen. Cambridge, MA: MIT Press.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Joshua Aizenman
    • 1
  1. 1.