Indexation and wage change settlement: Evidence from Spanish manufacturingfirms

An endogenous switching model of ex-ante wage changes under indexed and non -indexed settlements is estimated for the Spanish manufacturing sector usin g collective bargaining firm data for the 1984-1991 period. The likelihood of indexing the settlement is higher for nationwide unions than for other u nion groups within the works council and increases with the expected level of inflation. For wage change equations, a common structure for indexed and non-indexed settlements is strongly rejected, showing a source of nominal rigidity. For indexed contracts, the expected ex-ante total inflation cover age is nearly complete. It is also shown that workers pay a significant ex- ante change premium (differential) to obtain a cost of living allowance cla use. However, the realised contingent compensation exceeds such a premium f or all industries. Finally, important spillover effects in wage setting and the decision to index the settlement have been detected.