Indexation

Abstract

Many of the problems that occur in wage negotiations (and in financial transactions generally) result from the fact that services or goods are to be supplied over a period of months or years and the future level of prices is unknown. One way of dealing with this is by indexation or escalator clauses whereby the value of the payment is automatically revised in line with an agreed measure of prices. An example would be a one-year wage agreement between employees and employers in which the contract includes an ‘escalator clause’ by which the wage rate negotiated today will be increased (or decreased) each month in line with movements in the retail price index over the coming year. In this case wages are said to be contingent on retail prices. The wide international experience of indexation agreements is summarised by Page (1975) and Beeton (1985). Their long history in Australia is discussed in Chapter 1, section 1.6 above, while in section 1.4 for the UK the Heath government’s ‘threshold payments’ are explained.