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Asymmetric wage indexation

  • James Cover
  • David Hoose

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

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File URL: http://hdl.handle.net/10.1007/BF02299145
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Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 30 (2002)
Issue (Month): 1 (March)
Pages: 34-47

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Handle: RePEc:kap:atlecj:v:30:y:2002:i:1:p:34-47
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  1. Kandil, Magda, 1998. "Supply-Side Asymmetry and the Non-Neutrality of Demand Fluctuations," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 785-809, October.
  2. Laurence Ball, 1988. "Is Equilibrium Indexation Efficient?," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 299-311.
  3. James Peery Cover, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1261-1282.
  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. David Card, 1984. "An Empirical Model of Wage Indexation Provisions in Union Contracts," NBER Working Papers 1388, National Bureau of Economic Research, Inc.
  6. David D. VanHoose & Christopher J. Waller, 1989. "Discretion, wage indexation, and inflation," Research Working Paper 89-03, Federal Reserve Bank of Kansas City.
  7. Christopher J. Waller & David D. VanHoose, 1992. "Discretionary Monetary Policy and Socially Efficient Wage Indexation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1451-1460.
  8. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  9. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  10. Bryson, Jay H & Chen, Chih-huan & VanHoose, David D, 1998. " Implications of Economic Interdependence for Endogenous Wage Indexation Decisions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 693-710, December.
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