THE INCIDENCE AND INTENSITY OF WAGE INDEXATION - AN EMPIRICAL-ANALYSIS

Variables suggested by theoretical studies of indexation are considere d with a view to examining their utility in the context of the decisio n to index (incidence) and the desired degree of indexation when escal ator clauses are put into effect (intensity). The Tobit model, which c an address both of these issues, suggests that most of the effects of explanatory variables on the regressand occur by modifying the inciden ce of indexation, not its intensity. However, the Tobit model is itsel f rejected in favour of separate Probit and Truncated Regression inves tigations of incidence and intensity, respectively. The results obtain ed indicate that the standard list of explanatory variables, which one thinks of in the context of the theoretical literature as dealing pri marily with intensity, perform well in explaining incidence but very p oorly in accounting for the non-limit observations. The latter are inf luenced by bargaining power proxies such as the unemployment rate and union density; a very clear trade-off between indexed and non-continge nt wage adjustment can also be discerned. These results call for more theoretical attention to the distinction between indexation incidence and its intensity.