The effects of wage indexation on macroeconomic fluctuations. A generalization

This paper investigates the effects of wage indexation on fluctuations in employment, output, investment and the price level within a more general framework than that used in recent literature. The generalization involves: (a) a more general labor contract which allows labor supply as well as labor demand to affect actual employment in disequilibrium, and (b) a regular IS-LM framework which includes the previously used monetarist framework as a particular case. It is found that the effects of wage indexation on fluctuations in various economic variables depend in many cases on whether demand or supply dominates the labor market in disequilibrium. The exact dependence is characterized and used to reappraise recent results and develop new results.