Suppose that a decline in unionization reduces the amount of wage contracts that are being signed...

Suppose that a decline in unionization reduces the amount of wage contracts that are being signed and also brings about a reduction in the length of the typical wage contract that is signed. What would the impact on the inflation adjustment line for that economy be? Explain.

Expert Solution

Labour unions are employee associations. Labour law provides them with rights to organize

Inflation and wage contracts.

Increase in coverage by cost of living adjustment clauses; has made it difficult reduce the rate of inflation through Government policies. Both union bargaining power, and, inflation uncertainty affect the probability that a cost of living adjustment clause was adopted. Unanticipated changes in industry's prices negative influence the strength of the cost of living adjustment clauses. The wage inflation is greater under contracts with uncapped COLAs - cost of living adjustment. This was positively influenced by the amount of unanticipated inflation.

Unionization is positively correlated with peak inflation rates. Independent central banks, and, trade openness are correlated with lower inflation levels.

Higher levels of unionization --------> Wage inflexibility --------------> Price Increases

Higher peaks linked with higher levels of unionization

1 standard deviation increase percentage of private, and, public employees ---------> 8.5% higher inflation at the peak before monetary adjustment.

Rahul Sunny answered 2 years ago

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