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Wage Indexation, Employment and Inflation

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  • Drudi, Francesco
  • Giordano, Raffaela

Abstract

Price versus productivity-indexing is considered in a model of monetary policy with incomplete information and wage bargaining. In a perfectly price-indexed economy, the inflationary bias due to lack of credibility is eliminated. However, productivity-indexing is more appropriate to dampen macroeconomic fluctuations that are caused by real disturbances. We show that productivity-indexing alone guarantees both price and employment stability, provided the government's reputation is good enough and the union's bargaining power is not too strong. This reduces the degree of price indexation as the union becomes weaker and the government's reputation improves. Productivity-indexing is desirable with volatile productivity processes and weak unions. Copyright 2000 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Drudi, Francesco & Giordano, Raffaela, 2000. "Wage Indexation, Employment and Inflation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 645-668, December.
    • Handle: RePEc:bla:scandj:v:102:y:2000:i:4:p:645-68
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    Cited by:

    1. Shik Heo, 2003. "The Relationship Between Efficiency Wages And Price Indexation In A Nominal Wage Contracting Model," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 28(2), pages 117-128, December.
    2. James, Jonathan G. & Lawler, Phillip, 2006. "Productivity, indexation and macroeconomic outcomes: The implications of goods market competition and wage bargaining structure," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 465-479.
    3. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a central bank perspective," Occasional Papers 0705, Banco de España.

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