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Indexation and the Effect of a Price-Level Shock on Relative Wage Variability

A. Steven Holland and James S. Fackler
The Review of Economics and Statistics
Vol. 70, No. 3 (Aug., 1988), pp. 524-526
Published by: The MIT Press
DOI: 10.2307/1926794
Stable URL: http://www.jstor.org/stable/1926794
Page Count: 3
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Indexation and the Effect of a Price-Level Shock on Relative Wage Variability
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Abstract

Empirical studies indicate that price-level shocks increase the variability of relative prices but reduce the variability of relative wages. Some authors suggest that the discrepancy reflects an omitted variable, the degree of wage indexation. We use a proxy for the degree of wage indexation in the United States--the prevalence of cost-of-living adjustment clauses in major collective bargaining agreements--to reexamine the relationship between price-level shocks and relative wage variability. We find that although it tends to reduce relative wage variability, indexation is not responsible for the absence of a positive effect of a price-level shock.

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