Working Paper: NBER ID: w1046
Authors: Richard C. Marston
Abstract: This paper examines the desirability of wage indexation in an open economy subject to economic disturbances which change the terms of trade and raise the prices of imported goods. Two indexation rules are considered, the traditional form of indexation to the consumer price index and indexation to the price of domestic goods alone, the latter proposed as a means of limiting the influence of import prices on the economy. The effects of the rules are shown to depend upon how the terms of trade rather than import prices alone respond to disturbances, since changes in the terms of trade determine what adjustments are required in the two real wages faced by firms and labor.
Keywords: Wage Indexation; Terms of Trade; Open Economy; Economic Disturbances
JEL Codes: E31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| terms of trade changes (F14) | adjustments in real wages (J39) |
| wage indexation to domestic prices (E64) | stabilization of output during aggregate demand disturbances (E23) |
| consumer price indexation (C43) | decrease in output (E23) |
| domestic price indexation (C43) | greater variation in output during aggregate supply disturbances (E23) |
| consumer price indexation (C43) | lesser variation in output during aggregate supply disturbances (E23) |