The Changing Responsiveness of Wages to Price-Level Shocks: Explicit and Implicit Indexation

A Steven Holland

Economic Inquiry, 1988, vol. 26, issue 2, 265-79

Abstract: This article provides evidence for the U.S. over the period 1961-84 that the respons iveness of nonunion wages to price-level shocks changes through time much as the degree of indexation in union contracts does, suggesting that there exists implicit as well as explicit indexation. When coupl ed with the result from previous research that indexation responds po sitively to inflation uncertainty, the findings indicate that greater inflation uncertainty may lead to reduced overall wage rigidity. In the context of a rational expectations model with long-term wage cont racts, a decline in the effectiveness of an activist monetary policy could result. Copyright 1988 by Oxford University Press.

Date: 1988
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