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a) Assume that the consumer price index (CPI) for the period 2004 -2008 has the following values:
2004 104.7
2005 107.0
2006 109.1
2007 111.5
2008 114.1
Suppose that the hourly wage rate for a group of workers that sign an employment contract for a three-year period starting in 2005 is indexed to the CPI according to the following COLA formula:
?w/w = 0.03 + 0.5 ?CPI/CPI.
Calculate the actual increase in the nominal wage during each year of the contract period. If the nominal wage in 2005 was $ 18.00, what was it in 2006, 2007 and 2008? (10) How did the real wage change in those years?
b) Does an increase in the average annual labour income imply that the individual worker's labour income has increased? Explain.
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Economics of Markets and Organizations
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