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The Relationship Between Efficiency Wages And Price Indexation In A Nominal Wage Contracting Model

  • Shik Heo

    ()

    (Department of Economics, Chung-Ang University)

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    This paper examines how a link between efficiency wages and price indexation can arise in a simple nominal wage contracting model. We show that, the more elastic the worker¡¯s effort is with respect to real wages, the looser the optimal linkage of nominal wages is to the price level. This is simply because, as the worker¡¯s effort becomes more sensitive to real wages, the output-stabilizing indexing scheme has to make nominal wages less dependent on the price level, thereby delegating firms more flexibility for adjusting the output level. As long as efficiency wages as an incentive device work well in the economy, our result may help explain the recent decline in the share of U.S. union contracts adjusting to a cost of living index.

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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 28 (2003)
    Issue (Month): 2 (December)
    Pages: 117-128

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    Handle: RePEc:jed:journl:v:28:y:2003:i:2:p:117-128
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    1. Duca, John V, 1987. "The Spillover Effects of Nominal Wage Rigidity in a Multisector Economy: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 117-21, February.
    2. John V. Duca & David D. VanHoose, 1988. "Wage indexation in a multisector economy," Finance and Economics Discussion Series 47, Board of Governors of the Federal Reserve System (U.S.).
    3. Drudi, Francesco & Giordano, Raffaela, 2000. " Wage Indexation, Employment and Inflation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 645-68, December.
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