The Changing Responsiveness of Wages to Price‐level Shocks: Explicit and Implicit Indexation

The article provides evidence for the U.S over the period 1961‐84 that the responsiveness of nonunion wages to price‐level shocks changes through time much as the degree of indexation in union contracts does, suggesting that there exists implicit as well as explicit indexation. When coupled with the result from previous research that indexation responds positively to inflation uncertainty, the findings indicate that greater inflation uncertainty may lead to reduced overall wage rigidity. In the context of a rational expectations model with long‐term wage contracts, a decline in the effectiveness of an activist monetary policy could result.