Was Milton Friedman's Hope for Monetarism Reasonable? Optimal Wage Indexation Re-Examined.

Abstract

Gray and Benassy analysed the optimal wage indexation choice for representative agents and labor unions when monetary or/and real shocks are generated by a symmetric distribution. Here their analysis is extended to the more relevant choice for firm owners. In general, the probability of contractionary monetary and real shocks, either alone or simultaneously, can make any degree of indexation optimal. If restricted to plausible values, a firm’s optimal choice is usually the opposite of that for representative/self-employed agents or labor unions, because it can increase the owner’s profit at the expense of worker’s income. Indexation is arguably non-optimal for firms.