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Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts

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  • Card, David

Abstract

This paper examines the effect of nominal contracting provisions on employment determination in union contracts. In most contracts, the nominal wage rate is wholly or partially predetermined. Real wage rates therefore contain unanticipated components that reflect unexpected price changes and the degree of indexation. The empirical analysis, based on a large sample of indexed and nonindexed contracts, suggests that unexpected real wage changes are associated with systematic employment responses in the opposite direction. The author concludes that nominal contracting provisions play a potentially important role in the cyclical properties and persistence of employment movements in the union sector. Copyright 1990 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 80 (1990)
Issue (Month): 4 (September)
Pages: 669-88

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Handle: RePEc:aea:aecrev:v:80:y:1990:i:4:p:669-88

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  2. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
  3. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  4. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  5. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  6. John M. Abowd, 1987. "Collective Bargaining and the Division of the Value of the Enterprise," NBER Working Papers 2137, National Bureau of Economic Research, Inc.
  7. Brown, James N & Ashenfelter, Orley, 1986. "Testing the Efficiency of Employment Contracts," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S40-S87, June.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  9. L Christofides & A Oswald, 1991. "Efficient and Inefficient Employment Outcomes: A Study Based on Canadian Contract Data," CEP Discussion Papers dp0041, Centre for Economic Performance, LSE.
  10. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  11. Kennan, John, 1988. "An Econometric Analysis of Fluctuations in Aggregate Labor Supply and Demand," Econometrica, Econometric Society, vol. 56(2), pages 317-33, March.
  12. David Card, 1988. "Strikes and Wages: A Test of a Signalling Model," NBER Working Papers 2550, National Bureau of Economic Research, Inc.
  13. repec:fth:prinin:222 is not listed on IDEAS
  14. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
  15. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 854-71, August.
  16. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
  17. Douglas Holtz-Eakin & Whitney Newey & Harvey Rosen, 1987. "Wages and Hours: Estimating Vector Autoregressions with Panel Data," Working Papers 602, Princeton University, Department of Economics, Industrial Relations Section..
  18. Louis N. Christofides & Andrew J. Oswald, 1991. "Efficient and Inefficient Employment Outcomes: A Study Based on Canadian Data," NBER Working Papers 3648, National Bureau of Economic Research, Inc.
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