The Determinants of Wage Changes in Indexed.and Nonindexed Contracts: A Switching Model
Wage changes in a sample (1979-86) of Canadian wage contracts are analyzed. The sample is split into cost-of-living allowance (COLA) and non-COLA contracts. Econometric estimation corrects for sample selectivity bias. In non-COLA contracts, the unemployment rate and a proxy for expected inflation are significant. Expected industry price changes and productivity changes exert smaller but significant effects. In COLA contracts, ex ante inflation coverage ranges between 60 percent and 100 percent of expected inflation. Catch-up for previous uncompensated.inflation, the unemployment rate, and expected inflation are also significant. A common wage structure across COLA and non-COLA contracts is rejected by the data. Copyright 1992 by University of Chicago Press.
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