Indexation system for wages in dollars: Uruguay 2003-2022

Abstract

This article discusses the application of two alternative indexing systems for wages established in foreign currency. In particular, it assesses the impact of both on the average level and the variance of the purchasing power of wages. It presents a set of original models that correspond to different scenarios of price behavior, exchange rate, and salary adjustment system. It concludes that, under the most realistic assumptions, indexing based on the differential between inflation and depreciation of the national currency with respect to the foreign currency, without debugging the volatility of the variables, is the most appropriate to minimize the variance of the real wage. This result is confirmed by estimates made for Uruguay. The robustness of the same must be evaluated for scenarios that represent other behaviors of the variables.