I am personally much in favour of automatic wage indexation. This is often regarded as a rigidity and therefore as something bad. I don't quite see why.
Suppose you do not adjust wages to price levels. That means when there is inflation, labour supply should drop. The immediate result is a loss of welfare. Sure, this will lead to (individual) negotiations and maybe improved allocation in different jobs, but if not too much changes, you have menu cost only to end up in the same equilibrium.
Another way one might look at it is believing labour supply is totally inelastic. In that case, a drop in the real wage only changes the distribution of income, shifting the worker's surplus towards the employer's surplus. Granted, some people believe people should work at any price. There is no notion of freedom or even of a labour market in such a case. Furthermore, this price is then supposed to be set on a world product market, hence fully exogenous, which wouldn't exist for labour - so there could be no economic migration. This is not what we see in the world today.
Of course, if a single company would adjust the wages of it's employees to inflation, others would free-ride and undercut its position, taking the market. Therefore sectoral collective bargaining agreements are ideal. Another option is to organise indexation state-wide, but then second round effects (wage-price spirals) are more likely: indeed, if firms know that disposable income will change by two percent, they will be very inclined to increase prices with the same two percent. In case the adjustment is not timely or uniform, there is less temptation to do so. Obviously it is not fully true that disposable income increases, because prices have already increased when wages are adjusted.
Finally, the allocation issue in fact shifts from worker allocation to firm's market share when all wages are adjusted and prices cannot be increased. This implies other compensations: lower profits, more innovation, wage compression, etc. This might either be within firms, or through the composition of the population of firms, which is known as creative destruction, as coined by Schumpeter.
In the end, that is what competition in the real, not nominal, world is about.
