Wage Indexation Research Articles

Central Bank Independence and the Cost of Disinflation: Why the Wage Contracts Length Matters?

Recent empirical contributions demonstrate that countries with less independent central banks enjoy lower output losses during disinflationary cycles. To explain these somewhat surprising empirical findings, some authors suggest that independent central banks probably face a flatter short-run Phillips curve. In this paper, we provide both theoretical and empirical arguments to rationalize this intuition. We demonstrate that, since central bank independence reduces the mean inflation rate and its variance, wage setters opt for a lower degree of nominal wage indexation leading to more wage and price inertia and, thus, to a flatter short-run Phillips curve. Consequently, this paper put forward a channel of positive influence of central bank independence on the sacrifice ratio through its impact on nominal wage indexation. Empirical tests, performed using a sample of 19 OECD countries during the 1960–1990 period, show that these theoretical results hold also empirically.

Productivity, indexation and macroeconomic outcomes: The implications of goods market competition and wage bargaining structure

One strand of the macroeconomics literature explores the extent to which the indexation of nominal wages to a variable in addition to the price level can improve macroeconomic performance. The present paper contributes to this literature by developing a model in which the nominal wage is indexed not only to the price level but also to productivity. Two key features of the framework are a monopolistically competitive goods market and a unionized labor market in which wages are determined by a finite number of unions. A significant finding is that the multiparameter indexation scheme generally outperforms full-information wage setting.

Wage Indexation and Monetary Policy

This paper analyzes the effect of indexed wage contracts on inflation and social welfare in a Barro--Gordon model with state-contingent monetary policy. Wage indexation reduces the inflation bias but may raise the variance of inflation rates. In social optimum, wages are fully indexed to the price level, but this requires optimal wage adjustments to productivity shocks. If wage adjustments to productivity are suboptimal, the second-best solution calls for nonindexed wage contracts and a central banker with balanced aspiration levels of employment and real wages. In the case of decentralized wage bargaining, a prohibition of wage indexation may improve welfare.

Nominal Wage Flexibility, Wage Indexation and Monetary Union

Membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non-membership. This counteracts the stabilisation policy cost of giving up monetary independence. But more wage flexibility is only an imperfect substitute for an individual monetary policy. It is possible that an increase in wage flexibility is welfare-decreasing because of the accompanying rise in price variability. The interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full-indexation equilibrium.

The Income of the Swedish Baby Boomers

This paper study the income of Swedish households belonging to the baby boom generation, i.e those born in the 1940-50. An international comparison as well as an historical presentation of income patterns is given. However, the main purpose is to generate the future income of the baby boom generation as they get older. A major result is that the income standard of the young-old will become much higher than that of the very old. If our simulations bear the stamp of realism they suggest that we will see new and large poverty in Sweden among the very old in the future. The pension system contributes to this result. The front loaded design gives with its reduced wage indexation a higher income immediately after retirement but a much lower income at older age. From this perspective it is unfortunate that so much attention is given to the discussion of replacement rates. The replacement rate, although interesting in itself, completely miss the long run effect and just provides a comparison of incomes shortly after with incomes before retirement. If we instead focus on the relative income of older pensioners the results become quite different. Our results challenge the conception of a sustainable pension system. If the relative income of older pensioner’s drops and at the same time expenditures for health and care increase, one might wonder how the old in our society will make both ends meet. If pensions become too small to meet minimum standards the requirement of financial sustainability of the pension system results in an increasing financial burden on other parts of the general social protection system.

Default risk of wage-indexed payment mortgage in Turkey

This paper analyses default risk of wage-indexed payment mortgage (WIPM) in Turkey in comparison with other standard mortgage contracts originated in high inflationary economies. Emlak Bank launched WIPM linked to Civil Service employees’ wage (CSW) index during high inflationary period of late 1990s. Concurrently, the government introduced a policy linking CSW index to semi-annual expected rate of inflation in an attempt to facilitate housing finance for the fastest growing sector of the population. We find that WIPM protects borrowers against risk of high payment shocks whereas nominal contracts such as ARM and DIM would have resulted in high mortgage defaults.

Comparing New Keynesian models of the business cycle: A Bayesian approach

The baseline New Keynesian model cannot replicate the observed persistence in inflation, output, and real wages for sensible parameter values. As a result, several extensions have been suggested to improve its fit to the data. We use a Bayesian approach to estimate and compare the baseline sticky price model of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398.] and three extensions. Our empirical results are as follows. First, we find that adding price indexation improves the fit of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398.] model. Second, models with both staggered price and wage setting dominate models with only price rigidities. Third, introducing wage indexation does not significantly improve the fit. Fourth, all model estimates suggest a high degree of price stickiness. Fifth, the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts. Finally, the estimated inflation parameters of the Taylor rule are stable across models.

Evidence from the Skilled-Unskilled Canadian Wage Index

The authors critically reassess the standard view that Canada's skilled-unskilled wage differential has collapsed over the past four decades.

Aggregate Supply and Demand, the Real Exchange Rate and Oil Price Denomination

In an aggregate supply, aggregate demand model of an open economy with imperfect competition in labour and product markets, the effectiveness of monetary and fiscal policies depends on the degree of wage indexation, the exchange rate regime and the currency denomination of the international prices of raw materials, such as oil. In a two country world with a floating exchange rate, real consumer wage rigidity and the prices of imported raw materials fixed in the currency of Country 2, monetary policy is effective only in Country 2, but fiscal policy is relatively more effective in Country 1. These results may explain certain characteristics and have certain implications for economic policy in the US and the Eurozone.

My Life At HCFA: A True Parable

T he be st four and a half years of my professional life—as administrator of the Health Care Financing Administration (HCFA)—involved many tense congressional hearings, White House meetings, late-night phone conversations with the health and human services (HHS) secretary’s office or the Office of Management and Budget (OMB), and other stuff of high drama. Those years also contained a constant flow of formidable intellectual challenges: how to improve the hospital wage index; how to reduce beneficiaries’ copayments for outpatient services without busting the budget; how to permit states flexibility to expand Medicaid without violating federal law; and so on. But perhaps my fondest memory concerns something more mundane. Alone in my office one evening, I picked up the phone. On the other end was a young constituent service staffer from Rep. Louis Stokes’s office in Cleveland. Her call had obviously been misdirected, and she was flustered and embarrassed to find herself talking to me. She offered to call back in the morning, but I told her I would be happy to try to help her, and she told me the following story. Her constituent was a man in his fifties who had lost an arm in an industrial accident, as a result of which he qualified for Social Security Disability Insurance (SSDI) and, thereafter, Medicare, which was his only health insurance. With the income SSDI provided, and good health, he had managed for years to support himself quite adequately in the community, having no family and living alone. Then he developed carpal tunnel syndrome in his remaining hand. A sympathetic physician tried every form of medical and mechanical treatment for this painful and debilitating ailment, without avail. At that point, the surgical procedure of carpal tunnel release was the obvious and only treatment choice. It is routine and generally successful, with only one major problem: For six weeks after surgery, the patient has no effective use of the hand that has been operated on. For most patients, that’s a major inconvenience; for a one-armed man living alone, it C M S R e f l e c t i o n s

A note on the welfare consequences of wage indexing in a stochastic economy

This note surveys the welfare and real consequences of wage indexing in a stochastic economy whose monetary authority lacks credibility. It shows in a unified framework that those consequences might differ markedly depending on the nature and timing of the dominant disturbance in that economy. It finally provides a closed-form expression of the optimal level of wage indexing when all the shocks are taken into account.

Can the Scala Mobile Explain the Fall and Rise of Earnings Inequality in Italy? A Semiparametric Analysis, 1977–1993

This article uses Survey of Households' Income and Wealth microdata to investigate the role the Scala Mobile played in the initial fall and subsequent rise in earnings inequality in Italy between 1977 and 1993. The Scala Mobile was a wage indexation mechanism granting the same absolute wage increase to all employees as prices rose, thereby potentially compressing wage differentials. Over time, the potential equalizing effect of this mechanism fell. This article argues that the rise in inequality from the mid‐1980s was a response to the compression of differentials operated over the previous years by the Scala Mobile.

International Real Estate Review

This paper evaluates the Turkish government’s housing policy for financing the public sector housing and examines the desirability of wage-indexed payment mortgage (WIPM) contract from the lenders perspective. The WIPM contract introduced in 1998 differs from the standard index-linked mortgages in that it is based on the Civil Servant’s Wage Index and there is no amortization rate. From the lender’s perspective, the WIPMs are found to be desirable mortgage instruments in periods of persistent high inflation because they eliminate the real interest rate risk and credit risk of the ARM and the ‘wealth risk’ of a nominal FRM.

Trends in real wages during the industrial revolution: a view from across the Irish Sea

This article calculates cost of living indices for Ireland between 1785 and 1870 and real wage indices for agricultural labourers, textile workers, and building workers. These indices show gains in real wages which are not consistent with current hypotheses about widespread pre‐Famine immiseration, though textile workers did experience a reduction in earning power. Before the Famine, wages proved sticky downwards in the face of falling prices; after the Famine, money wages rose faster than prices. A revised UK index suggests that real wages began their increase earlier, in the 1820s, and increased by around an additional 10 percentage points by 1870.

The stabilization properties of fixed and floating exchange rate regimes

AbstractThis paper investigates the price and output stabilization properties of fixed and floating exchange rates using a small open economy model. The performance of the two regimes is compared in the face of money demand, aggregate demand and aggregate supply shocks. It is shown that the ranking of the two regimes is extremely sensitive to the weighting of the objective function as between price and output stability, the type of shock impinging upon the economy, the values of structural parameters of the economy and institutional features such as the degree of wage indexation within the economy. The results obtained suggest that estimates of the income elasticity of money demand, the elasticity of aggregate demand to changes in both the real exchange rate and the real interest rate, and the degree of openness of the economy are likely to be important to policymakers when making the choice of exchange rate regime. Neither regime can be said to be dominant in all circumstances. Copyright © 2004 John Wiley & Sons, Ltd.

Een halve eeuw vakbondslidmaatschap : Een verkennende longitudinale studie naar enkele cyclische determinanten voor de ledenontwikkeling van de Belgische vakbonden, 1946-1995

This article explains the ebb and flow in Belgian trade union membership from 1946 to 1995 by replicating the econometric model by Bain and Elsheikhn in which changes in macro-economic variables are highly significant. Since the automatic indexation of wages and the extension of collective labour agreements invite free riding, the relevance of the change in inflation and real wage is quite striking. However, the free riding-effect is slowed down by the institutionalised presence of the trade unions on the work floor. The Ghent system explains the positive impact of the unemployment rate . The model is furthermore improved by the trade union density as a structural variable. The linear form reflects the enforcement effect, while the quadratic form mirrors the saturation effect on the trade union membership. Mainly due to the 'Allgemeinkoalitionsfähighkeit' of the Belgian government system, the impact of left parties on union growth and decline is not significant in a quantitative framework. With only four explanatory variables the model clarifies more than 75% of the fluctuations in Belgian trade union membership.

Nominal Wage Flexibility and Monetary Union

The impact of the creation of a monetary union on structural convergence among member countries remains an open question. A model of monetary union is presented in which national nominal wage flexibility is endogenous and may vary across countries. We use wage indexation as a proxy for nominal wage flexibility and show how the strategic interaction between the monetary union central bank and wage bargainers results in “outlier” countries choosing an optimal wage contract which creates a more flexible nominal wage. The model predicts that if national business cycles are not perfectly synchronized, the optimal response of labor market participants to the creation of a single currency may promote structural divergence among member countries.

Ambiguity aversion and the absence of wage indexation

This paper analyzes optimal wage contracting assuming agents are not subjective expected utility maximizers but are, instead, ambiguity (or uncertainty) averse decision makers who maximize Choquet expected utility. We show that such agents will choose not to include any indexation coverage in their wage contracts even when inflation is uncertain, unless the perceived inflation uncertainty is high enough. Significantly, the exercise does not presume any exogenous costs (e.g., transactions costs) of including indexation links.

Inequality around the World

PART I: INTERNATIONAL PATTERNS AND ADVANCED COUNTRIES Wages Around the World: Pay Across Occupations and Countries R.B.Freeman & R.H.Oostendorp Australian Responses to Increases in Unemployment and Wage Inequality: Comparisons with the UK, NZ and USA R.G.Gregory Wage Indexation and the Evolution of Returns to Education in Italy. 1979-1992 M.Manacorda PART II: LESS ADVANCED COUNTRIES Markets, Human Capital, and Inequality: Evidence from Rural China D.Benjamin, L.Brandt, P.Glewwe & G.Li Inequality in Latin America During the 1990s M.Szekely & M.Hilgert Inequality and Mortality During Russia's Economic Transition E.Brainerd The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica F.El-Hamidi & K.Terrell PART III: UNDERSTANDING MICRO-BEHAVIOUR AND THE BROAD ECONOMY OF INEQUALITY The Economics of Reciprocity: Evidence and Theory A.Falk & U.Fischbacher Globalization and Redistribution: Feasible Egalitarianism in a Competitive World S.Bowles Distributed Information and the Role of the State in the Economy K.J.Arrow

Wage and Industry Effects in U.S. Regional Incomes, 1840 to 1987: A CES Wage Index Method

The Solow growth and the Heckscher-Ohlin trade models describe two competing processes through which regional incomes converge over time. Solow's model attributes rising productivity of labor to additional regional capital investments. Heckscher-Ohlin's trade model ascribes the relocation of high value industries to regions with low wage rates. On the other hand Paul Krugman expects incomes to diverge over time as regions with an initial advantage maintain it through ever increasing external economies of scale. The Solow and Heckscher-Ohlin models imply that incomes converge through the movement of high quality labor and capital and high value goods and services into low income regions respectively.