Abstract
This paper shows how heterogeneity in wage-setting and a link between goods-market competition and nominal wage indexation can arise in a multisector economy. By raising the price elasticity of demand, increased goods-market competition makes labor demand and equilibrium employment less sensitive to aggregate demand shocks, thereby reducing the incentive to index. We develop a proxy for the aggregate degree of goods-market competition. Along with inflation risk and supply shock variance measures, this proxy is statistically and economically significant in explaining changes over 1958–95 in the share of workers under contract who are covered by indexation clauses.
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