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Wage Indexation, Employment and Inflation

Author

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  • Francesco Drudi
  • Raffaela Giordano

Abstract

Price versus productivity‐indexing is considered in a model of monetary policy with incomplete information and wage bargaining. In a perfectly price‐indexed economy, the inflationary bias due to lack of credibility is eliminated. However, productivity‐indexing is more appropriate to dampen macroeconomic fluctuations that are caused by real disturbances. We show that productivity‐indexing alone guarantees both price and employment stability, provided the government's reputation is good enough and the union's bargaining power is not too strong. This reduces the degree of price indexation as the union becomes weaker and the government's reputation improves. Productivity‐indexing is desirable with volatile productivity processes and weak unions. JEL classification: E24; E52

Suggested Citation

  • Francesco Drudi & Raffaela Giordano, 2000. "Wage Indexation, Employment and Inflation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 645-668, December.
  • Handle: RePEc:bla:scandj:v:102:y:2000:i:4:p:645-668
    DOI: 10.1111/1467-9442.00219
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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