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Wage Indexation, Employment and Inflation
Author(s) -
Drudi Francesco,
Giordano Raffaela
Publication year - 2000
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00219
Subject(s) - indexation , economics , productivity , wage , inflation (cosmology) , credibility , bargaining power , search engine indexing , reputation , monetary economics , government (linguistics) , price of stability , macroeconomics , labour economics , monetary policy , microeconomics , social science , physics , artificial intelligence , sociology , theoretical physics , political science , linguistics , philosophy , law , computer science
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. JEL classification : E 24; E 52