Inflation and Indexation: An Empirical Approach

Abstract

Previous studies have examined various aspects of indexation. We can distinguish two major points of interest: wage determination, and the effects of indexation on macroeconomic fluctuations. Some scholars have attempted to determine empirically and theoretically the causes of cost-of-living adjustment (COLA) clauses in wage contracts [3;7; 11]. The focus in this research is often on major union contracts, with wage change a function of both real factors (e.g., the unemployment rate) and monetary factors (e.g., past inflation). Typical results are that past inflation will increase the adoption of indexation, while industry-specific shocks may cause resistance to indexation. In addition, Kaufman and Woglom [7] have shown that current labor market conditions have a significant impact on long-term contracts. Research has also been concerned with the effect of wage indexation on the macroeconomy [1;2;5;6]. How can wage indexation schemes be designed so as to alleviate the substantial income redistribution due to inflation and the use of contracts in nominal