Time-Varying Degree of Wage Indexation and the New Keynesian Wage Phillips Curve

Jonathan A. Attey
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Jonathan A. Attey: Erasmus University Rotterdam, The Netherlands

No 16-102/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Cost-of-Living-Adjustment (COLA) coverage figures suggest a time variation in the degree of wage indexation. In spite of this observation, most current literature conveniently assume a constant degree of indexation as this variable is not directly observable. This study intends to empirically measure the time variation in the degree of wage indexation. To this end, we derive a reduced form version of the New Keynesian Wage Phillips Curve under the assumption of a time varying degree of wage indexation. A state space methodology is then employed in estimating this model using data of selected OECD countries. The study subsequently investigates variables influencing the time variation in the degree of wage indexation. Our results consistently suggest a substantial time variation in the degree of wage indexation in all countries considered. The wage indexation estimates obtained for the US bear remarkable similarities with the figures suggested by COLA coverage. It is subsequently shown that variations in trend inflation significantly explain variations in the degree of wage indexation. Finally, there is weak evidence in support of the Gray hypothesis that wage indexation is negatively correlated with the variance of productivity shocks.

Keywords: Wage Indexation; Unemployment; Wage Phillips curve (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E40 (search for similar items in EconPapers)
Date: 2016-11-22
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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