THE RELATIONSHIP BETWEEN EFFICIENCY WAGES AND PRICE INDEXATION IN A NOMINAL WAGE CONTRACTING MODEL

Shik Heo ()
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Shik Heo: Department of Economics, Chung-Ang University

Journal of Economic Development, 2003, vol. 28, issue 2, 117-128

Abstract: This paper examines how a link between efficiency wages and price indexation can arise in a simple nominal wage contracting model. We show that, the more elastic the worker¡¯s effort is with respect to real wages, the looser the optimal linkage of nominal wages is to the price level. This is simply because, as the worker¡¯s effort becomes more sensitive to real wages, the output-stabilizing indexing scheme has to make nominal wages less dependent on the price level, thereby delegating firms more flexibility for adjusting the output level. As long as efficiency wages as an incentive device work well in the economy, our result may help explain the recent decline in the share of U.S. union contracts adjusting to a cost of living index.

Keywords: Efficiency Wages; Wage Indexation; Nominal Wage Contracting (search for similar items in EconPapers)
JEL-codes: J33 J41 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:jed:journl:v:28:y:2003:i:2:p:117-128

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