wage indexation

Wage indexation is a mechanism designed to adjust wages to information that cannot be foreseen when the wage contract is negotiated. A wage contract with indexation clauses will specify the wage base (that is, the money wage applicable in the absence of new information), the indexation formula that will be used to update wages, and how often updating will occur. Most traditional discussion has focused on wage indexation to the price level as a mechanism to stabilize real wages in the presence of inflation. More recently, however, attention has shifted to indexation to a wider set of indicators. These indicators include both richer price information (such as the value added price deflator and the terms of trade) and rules designed to index wages to indicators measuring the level of nominal activity (such as nominal GNP). Concurrently, growing attention has been given to the potential role of wage indexation in affecting the will and ability to reduce inflation.