| Abstract: | The purpose of this paper is to determine empirically the effect of general wage escalation, which is practiced in Israel, on the inflation unemployment trade off. Wage escalation is introduced by including a cost of living allowance variable in the wage equation which turns out to be very significant. It makes the long run Phillips Trade off relation much more inflationary, but does not obliterate it. A comparison with a wage price block for the U.S. suggests that the long run trade off is more inflationary in Israel and that wage indexation is one of the reasons for this bias. |
