Asymmetric Wage Indexation

Atlantic Econ. J. 30(1): pp. 34-47, March 2002

Posted: 6 Jun 2012

See all articles by James Peery Cover

James Peery Cover

University of Alabama - Department of Economics, Finance and Legal Studies

David D. VanHoose

Baylor University - Department of Economics

Date Written: March 5, 2002

Abstract

Models of wage indexation uniformly have been based on the simplifying assumption that nominal wages adjust upward or downward symmetrically with unexpected price increases or decreases. Indexation typically is asymmetric in actual contracts, however. Wages are indexed to price increases but not to price reductions. This paper analyzes a macroeconomic model with asymmetric indexation. On the one hand, this paper finds that when stable equilibria supporting use of such asymmetrically indexed contracts exist, the result is an unambiguous downward bias in the base contract wage, because workers must pay a premium for insurance against real wage reductions that unexpected inflation otherwise would induce. On the other hand, the paper concludes that the likelihood of existence of stable equilibria supporting positive wage indexation generally declines as aggregate demand variability rises relative to the variability of aggregate supply. This may help explain why relatively low levels of wage indexation actually are observed in nations with relatively contained aggregate demand volatility.

Keywords: wage indexation, asymmetry

JEL Classification: E24

Suggested Citation

Cover, James Peery and VanHoose, David D., Asymmetric Wage Indexation (March 5, 2002). Atlantic Econ. J. 30(1): pp. 34-47, March 2002 , Available at SSRN: https://ssrn.com/abstract=2078397

James Peery Cover (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8977 (Phone)
205-348-0590 (Fax)

David D. VanHoose

Baylor University - Department of Economics ( email )

P.O. Box 98003
Waco, TX 76798-8003
United States

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