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Optimal Wage Indexation in a Multisector Economy

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  • Duca, John V
  • VanHoose, David D

Abstract

Optimal wage indexation is analyzed in an economy subject to common and sector-specific supply shocks and aggregate demand shocks where one sector has wage contracts and the other has a Walrasian labor market. It is shown that it is optimal in this setting to index wages partially to unanticipated economywide inflation and to industry-specific profits. Consequently, this study provides possible theoretical explanations for observation of both CPI indexation and profit-sharing contracts, and for the failure of purely aggregative indexation models to explain disaggregate-level behavior. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 32 (1991)
Issue (Month): 4 (November)
Pages: 859-67

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Handle: RePEc:ier:iecrev:v:32:y:1991:i:4:p:859-67

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Cited by:
  1. James, Jonathan G. & Lawler, Phillip, 2010. "Union objectives and indexation externalities in a monopolistically competitive economy," Research in Economics, Elsevier, vol. 64(1), pages 28-35, March.
  2. James, Jonathan G. & Lawler, Phillip, 2006. "Productivity, indexation and macroeconomic outcomes: The implications of goods market competition and wage bargaining structure," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 465-479.
  3. Ana María Iregui & Ligia Alba Melo & María Teresa Ramírez, 2009. "Rigideces de los salarios a la baja en Colombia: Evidencia empírica a partir de una muestra de salarios a nivel de firma," BORRADORES DE ECONOMIA 005757, BANCO DE LA REPÚBLICA.
  4. Duca, John V. & VanHoose, David D., 1998. "Goods-market competition and profit sharing: a multisector macro approach," Journal of Economics and Business, Elsevier, vol. 50(6), pages 525-534, November.
  5. Ghosal, Vivek & Loungani, Prakash, 1996. "Evidence on Nominal Wage Rigidity from a Panel of U.S. Manufacturing Industries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 650-68, November.
  6. Oscar Landerretche & Fernando Lefort & Rodrigo O. Valdés, 2002. "Causes and Consequences of Indexation: A Review of the Literature," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 2, pages 019-064 Central Bank of Chile.
  7. Duca, John V. & Van Hoose, David D., 2001. "The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 1-29, January.
  8. Carl R. Gwin & David D. Van Hoose, 2008. "Disaggregate Evidence On Price Stickiness And Implications For Macro Models," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 561-575, October.
  9. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, 04.
  10. Marco Guerrazzi, 2010. "Nominal Wage Indexation, Quasi-Equilibria And Real Wage Dynamics," Bulletin of Economic Research, Wiley Blackwell, vol. 62(3), pages 279-294, 07.
  11. Duca, John V. & Vanhoose, David D., 1998. "The Rise of Goods-Market Competition and the Decline in Wage Indexation: A Macroeconomic Approach," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 579-598, July.

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