Wage indexation
Also called: Cost of living adjustment · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"
Meaning
Wage indexation means raising wages and salaries in line with the Consumer Price Index (CPI), so workers keep the same living standard as in the base year. The rise needed equals the rise in the index. For example, an index of 150 means a 50% raise is needed. It matters because it protects the real wage (what pay can actually buy) from inflation.
Example
A worker's base-year salary is ₹4,000 and the CPI is now 400. The salary needed today is ₹4,000 × 400/100 = ₹16,000. If the worker currently earns ₹6,000, the salary must rise by ₹10,000. In India, the Dearness Allowance of government employees, revised using CPI-IW, is a working form of wage indexation.
Don't confuse with
- Indexation (general): this is the wider idea of adjusting pensions, tax brackets, capital-gains costs and bonds for inflation. Wage indexation covers only pay.