The incidence and intensity of wage indexation: an empirical analysis
Variables suggested by theoretical studies of indexation are considered with a view to examining their utility in the context of the decision to index (incidence) and the desired degree of indexation when escalator clauses are put into effect (intensity). The Tobit model, which can address both of these issues, suggests that most of the effects of explanatory variables on the regressand occur by modifying the incidence of indexation, not its intensity. However, the Tobit model is itself rejected in favour of separate Probit and Truncated Regression investigations of incidence and intensity, respectively. The results obtained indicate that the standard list of explanatory variables, which one thinks of in the context of the theoretical literature as dealing primarily with intensity, perform well in explaining incidence but very poorly in accounting for the non-limit observations. The latter are influenced by bargaining power proxies such as the unemployment rate and union density; a very clear trade-off between indexed and non-contingent wage adjustment can also be discerned. These results call for more theoretical attention to the distinction between indexation incidence and its intensity.