Optimal Wage Indexation in a Multisector Economy
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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Volume (Year): 32 (1991)
Issue (Month): 4 (November)
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