THE CHANGING RESPONSIVENESS OF WAGES TO PRICE-LEVEL SHOCKS: EXPLICIT AND IMPLICIT INDEXATION

Authors

  • A. Steven Holland

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    • *Assistant Professor, University of Kentucky. Helpful comments from Mukhtar Ali, Dan Black, Alex Cukierman, James Fackler, John Garen, Daniel Hamermesh, Richard Sweeney, Daniel Thornton, two referees, and participants in the Macroeconomics Workshop at the University of Kentucky and a session of the 1986 Western Economic Association Conference are gratefully acknowledged. Part of this research was conducted at the Federal Reserve Bank of St. Louis with the assistance of Laura Prives and Jude Naes. The views expressed do not necessarily reflect those of the Federal Reserve Bank of St. Louis or the Federal Reserve System.


Abstract

The article provides evidence for the U.S over the period 1961-84 that the responsiveness 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 coupled with the result from previous research that indexation responds positively 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 contracts, a decline in the effectiveness of an activist monetary policy could result.

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