The central role of the decline in wage-price indexation

When we look at the United States and the euro zone, we see that the indexation of nominal wages to prices has declined over time. Given the elasticity of prices to unit labour costs, we have gone from a situation where, in the 1970s-80s, an ex ante exogenous shock of 1% to prices led ultimately to a 1.5% increase in prices in the United States and the euro zone, to one where the same shock leads ultimately to an increase in prices of 1.1% in the United States and 1.25% in the euro zone. The price-wage spiral has been weakened hugely by the decline in the degree of wage -price indexation.