Question

How does indexing wage contracts to inflation help workers?

Short answer

Indexing wage contracts to inflation helps workers in many different ways.

Step-by-step solution

Step 1. Meaning of inflation index.

Is an index that tracks inflation in a country. Commonly this is done by taking a base year value and showing the change caused to this base year value over the years due to inflation.

Step 2. Indexing wage contracts to inflation help workers in different ways:-

a) Wage indexation is reduced social costs of inflation because real wage stability is viewed as being socially desirable.

b) Wage indexation helps to avoid reductions in employment during the transition from high to low inflation rates.

c) Wage indexation is efficient, even in a decentralized economy.