Abstract
The choice between an indexed and an unindexed wage in a labor contract is studied in this paper. It is shown that the expected rate of inflation does not affect the attractiveness of indexation; that an increase in the uncertainty of inflation and an increase in the worker's risk aversion lead to an increase in the attractiveness of indexation; and that an increase in the cost of indexation and an increase in the perfection of the capital market lead to a decrease in the attractiveness of indexation. Labor contracts often index the money wage to the price level. Indexation serves as an important means of reducing the variation in the real wage caused by stochastic inflation, and it may therefore moderate the impact that stochastic inflation would otherwise have on a worker's consumption and working hours; cf. Gray (1976), Fischer (1977 a) and Azariadis (1978). Accordingly, indexation may benefit a worker who is averse to risk; cf. Baily (1974), Gordon (1974) and Azariadis (1975). Indexation may also reduce the variation in working hours, thereby benefiting a firm that pro
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
