Asymmetric wage indexation

Models of wage indexation uniformly have been based on the simplifying assumption that nominal wages adjust upward or downward symmetrically with unexpected price increases or decreases. Indexation typically is asymmetric in actual contracts, however. Wages are indexed to price increases but not to...

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Bibliographic Details
Published inAtlantic economic journal Vol. 30; no. 1; pp. 34 - 47
Main Authors Hoose, David, Cover, James Peery
Format Journal Article
LanguageEnglish
Published New York International Atlantic Economic Society 01.03.2002
Springer
Springer Nature B.V
SeriesAtlantic Economic Journal
Subjects
Analysis
Economic models
Economic research
Economic theory
Economics
Indexation
Indexation (Economics)
Inflation (Finance)
Labor economics
Studies
United States
Wages
Wages & salaries
United States
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Summary:Models of wage indexation uniformly have been based on the simplifying assumption that nominal wages adjust upward or downward 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 ar e observed in nations with relatively contained aggregate demand volatility. (JEL E24)
ISSN:0197-4254
1573-9678
DOI:10.1007/BF02299145