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Uncertainty and Labor Contract Durations

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Author Info
Robert Rich (Federal Reserve Bank of New York)
Joseph Tracy (Federal Reserve Bank of New York)

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Abstract

This paper provides an empirical investigation into the relationship between uncertainty and ex ante U.S. labor contract durations over the period 1970 to 1995. Using a structural identification of aggregate demand and aggregate supply shocks, we find that desired contract durations are shorter during periods of heightened nominal or real uncertainty. This evidence supports the view that labor contract durations respond endogenously to the aggregate uncertainty prevailing at the time they are negotiated, but suggests that risk-sharing concerns are not paramount. The analysis also considers several measures of inflation uncertainty that have appeared in the literature. The results generally corroborate previous findings of an inverse relationship between desired contract durations and the level of inflation uncertainty. Copyright (c) 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 86 (2004)
Issue (Month): 1 (01)
Pages: 270-287
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Handle: RePEc:tpr:restat:v:86:y:2004:i:1:p:270-287

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John B. Taylor, 1980. "Aggregate Dynamics and Staggered Contracts," NBER Reprints 0126, National Bureau of Economic Research, Inc.
    Other versions:
  2. Ronald G. Ehrenberg & Leif Danziger & Gee San, 1984. "Cost-of-Living Adjustment Clauses in Union Contracts," NBER Working Papers 0998, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Christofides, Louis N, 1985. "The Impact of Controls on Wage Contract Duration," Economic Journal, Royal Economic Society, vol. 95(377), pages 161-68, March. [Downloadable!] (restricted)
  4. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November. [Downloadable!] (restricted)
  5. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," NBER Reprints 2091, National Bureau of Economic Research, Inc.
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  6. Kevin J. Murphy, 1992. "Determinants of contract duration in collective bargaining agreements," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 45(2), pages 352-365, January.
  7. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April. [Downloadable!] (restricted)
  8. Wallace Hendricks & Larry M. Kahn, 1983. "Cost-of-living clauses in union contracts: Determinants and effects," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 36(3), pages 447-460, April.
  9. Mullineaux, Donald J, 1980. "Unemployment, Industrial Production, and Inflation Uncertainty in the United States," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 163-69, May. [Downloadable!] (restricted)
  10. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May. [Downloadable!] (restricted)
  11. Card, David, 1986. "An Empirical Model of Wage Indexation Provisions in Union Contracts," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S144-75, June. [Downloadable!] (restricted)
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  12. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-59, July. [Downloadable!] (restricted)
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  13. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September. [Downloadable!] (restricted)
  14. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  15. Peter Cramton & Morley Gunderson & Joseph Tracy, 1999. "The Effect Of Collective Bargaining Legislation On Strikes And Wages," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 475-487, August. [Downloadable!] (restricted)
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  16. Canzoneri, Matthew B., 1980. "Labor contracts and monetary policy," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 241-255, April. [Downloadable!] (restricted)
  17. Levi, Maurice D & Makin, John H, 1980. "Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 70(5), pages 1022-27, December. [Downloadable!] (restricted)
  18. Wallace, Frederick H, 2001. "The Effects of Shock Size and Type on Labor-Contract Duration," Journal of Labor Economics, University of Chicago Press, vol. 19(3), pages 658-81, July. [Downloadable!] (restricted)
  19. Danziger, Leif, 1988. "Real Shocks, Efficient Risk Sharing, and the Duration of Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 435-40, May. [Downloadable!] (restricted)
  20. Rich, R W & Raymond, J E & Butler, J S, 1992. "The Relationship between Forecast Dispersion and Forecast Uncertainty: Evidence from a Survey Data-ARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 131-48, April-Jun. [Downloadable!] (restricted)
  21. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-1), pages 77-146. [Downloadable!]
  22. Pagan, A R & Hall, A D & Trivedi, P K, 1983. "Assessing the Variability of Inflation," Review of Economic Studies, Blackwell Publishing, vol. 50(4), pages 585-96, October. [Downloadable!] (restricted)
  23. Cousineau, Jean-Michel & Lacroix, Robert & Bilodeau, Danielle, 1983. "The Determination of Escalator Clauses in Collective Agreements," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 196-202, May. [Downloadable!] (restricted)
  24. Schnell, John F & Gramm, Cynthia L, 1987. "Learning by Striking: Estimates of the Teetotaler Effect," Journal of Labor Economics, University of Chicago Press, vol. 5(2), pages 221-41, April. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John V. Duca & Carl M. Campbell, III, 2007. "The impact of evolving labor practices and demographics on U.S. inflation and unemployment," Working Papers 0702, Federal Reserve Bank of Dallas. [Downloadable!]
  2. Louis Christofides & Chen Peng, 2003. "Contract Duration and Indexation in a Period of Real and Nominal Uncertainty," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  3. Berk, J.M & Swank, J., 2002. "Regional price adjustment in a monetary union: the case of EMU," Serie Research Memoranda 0016, Free University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
    Other versions:
  4. Louis Christofides & Amy Chen Peng, 2006. "Major Provisions of Labour Contracts and their Theoretical Coherence," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  5. Comin, D., 2000. "An Uncertainty-Driven Theory of the Productivity Slowdown: Manufacturing," Working Papers 00-16, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  6. C. Benassi & A. E. Scorcu, 2002. "Imperfect Information," Working Papers 450, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
  7. Jan Marc Berk & Job Swank, 2002. "Regional Price Adjustment in a Monetary Union," Tinbergen Institute Discussion Papers 02-077/2, Tinbergen Institute. [Downloadable!]
  8. Christofides, L. & Peng, A., 2007. "Real Wage Chronologies," Working Papers 2007-7, University of Guelph, Department of Economics. [Downloadable!]
    Other versions:
  9. Matthias Paustian, 2005. "The role of contracting schemes for the welfare costs of nominal rigidities," Computing in Economics and Finance 2005 196, Society for Computational Economics. [Downloadable!]
  10. Jonathan Yoder & Ishrat Hossain & Francis Eppin & Damona Doye, 2005. "Contract Duration and the Division of Labor in Agricultural Land Leases," Working Papers 2005-6, School of Economic Sciences, Washington State University. [Downloadable!]
    Other versions:
  11. Danziger, Leif & Neuman, Shoshana, 2003. "Delays in Renewal of Labor Contracts: Theory and Evidence," IZA Discussion Papers 709, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  12. Leif Danziger, 2006. "Extension of Labor Contracts and Optimal Backpay," IZA Discussion Papers 2366, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  13. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Working Papers 01-16, Bank of Canada. [Downloadable!]
  14. Joseph Engelberg & Charles F. Manski & Jared Williams, 2006. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," NBER Working Papers 11978, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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