Should the Consumer Price Index Determine Wages?

by Daniel Mitchell

Fall 1982

Volume 25
Issue 1

Full Article Browse Issue



The article focuses on relation between consumer price index (CPI) and wages. Critics claim that the CPI exaggerates the rate of inflation and question whether price increases should be the major element in wage decisions. Increased emphasis on gain sharing and tax incentives for gain-sharing plans may be the answer to their criticism. The inflation that developed in the late 1960s and 1970s focused attention on the use of price statistics as guides for decision making. By the year 1980, the CPI was used to index or escalate the wages of about 57 percent of the workers under major private union agreements. Although one can quarrel with any price index, the revisions in the CPI announced by the Bureau of Labor Statistics in 1981 will improve the quality of the index as a guide to wage setting. However, wage setters need to understand the CPI and its limitations. There will never be a perfect price index. And it is likely that the CPI would be a better index if its importance to wage setters were reduced.

California Management Review

Berkeley-Haas's Premier Management Journal

Published at Berkeley Haas for more than sixty years, California Management Review seeks to share knowledge that challenges convention and shows a better way of doing business.

Learn more
Follow Us