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Asymmetric wage indexation

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  • James Cover
  • David Hoose

Abstract

Models of wage indexation uniformly have been based on the simplifying assumption that nominal wages adjust upward or downwrd symmetrically with unexpected price increases or decreases. Indexation typically is asymmetric in actual contracts, however. Wages are indexed to price increases but not to price reductions. This paper analyzes a macroeconomic model with asymmetric indexation. On the one hand, this paper finds that when stable equilibria supporting use of such asymmetrically indexed contracts exist, the result is an unambiguous downward bias in the base contract wage, because workers must pay a premium for insurance against real wage reductions that unexpected inflation otherwise would induce. On the other hand, the paper concludes that the likelihood of existence of stable equilibria supporting positive wage indexation generally declines as aggregate demand variability rises relative to the variability of aggregate supply. This may help explain why relatively low levels of wage indexation actually are observed in nations with relatively contained aggregate demand volatility. Copyright International Atlantic Economic Society 2002

Suggested Citation

  • James Cover & David Hoose, 2002. "Asymmetric wage indexation," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(1), pages 34-47, March.
    • Handle: RePEc:kap:atlecj:v:30:y:2002:i:1:p:34-47
    DOI: 10.1007/BF02299145
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    Cited by:

    1. Magda Kandil, 2019. "External Cyclicality in the Face of Aggregate Demand Shocks: Pros and Cons Across Developed and Developing Countries," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 48(1), February.
    2. Giuseppe Diana & Pierre‐Guillaume Méon, 2008. "Monetary Policy in the Presence of Asymmetric Wage Indexation," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 69-90, July.
    3. Magda Kandil, 2006. "On the Transmission Mechanism of Policy Shocks in Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 34(2), pages 117-149.
    4. Lars Calmfors & Asa Johansson, 2006. "Nominal Wage Flexibility, Wage Indexation and Monetary Union," Economic Journal, Royal Economic Society, vol. 116(508), pages 283-308, January.
    5. Carrillo, Julio A. & Peersman, Gert & Wauters, Joris, 2022. "Endogenous wage indexation and aggregate shocks," Journal of Macroeconomics, Elsevier, vol. 72(C).
    6. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2020. "Progressive taxation and human capital as determinants of inflation persistence," Economic Modelling, Elsevier, vol. 88(C), pages 82-97.
    7. Kandil, Magda, 1998. "Supply-Side Asymmetry and the Non-Neutrality of Demand Fluctuations," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 785-809, October.
    8. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2016. "Inflation persistence: The path of labor market structural reforms," Economic Modelling, Elsevier, vol. 58(C), pages 317-322.
    9. Kandil, Magda, 2007. "The wage-price spiral: International evidence and implications," Journal of Economics and Business, Elsevier, vol. 59(3), pages 212-240.

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