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A Risk-Sharing View of Real Wages and Contract Length

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Abstract

This paper models a union and firm choosing between long labor contracts, in which wages are predetermined, and short contracts, in which wages are flexible. It is shown that the union strictly prefers short contracts because it dislikes the greater employment volatility in long contracts. In contrast, the convexity of the firm's profit function leads the firm to prefer the greater uncertainty of long contracts. The model predicts that workers are prepared to enter long contracts only if they are compensated with a higher real wage. This prediction is tested using a large sample of Canadian collective agreements, with generally supportive results.

Suggested Citation

  • Christopher Ragan, 1995. "A Risk-Sharing View of Real Wages and Contract Length," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4b), pages 1161-1179, November.
  • Handle: RePEc:cje:issued:v:28:y:1995:i:4b:p:1161-79
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    Cited by:

    1. Josep Tribo, 2005. "An analysis of the length of labour and financial contracts: a study for Spain," Applied Economics, Taylor & Francis Journals, vol. 37(8), pages 905-916.

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