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The Welfare Costs of Nominal Wage Contracting

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Abstract

We use a dynamic general equilibrium model to obtain quantitative estimates of the welfare costs of nominal wage contracts. We find that the welfare costs of such contracts can vary quite a bit depending on the degree of indexation, the size and persistence of money supply uncertainty and the contract length. However, the size and persistence of the technology shocks do not affect the welfare costs very much. The welfare costs of nominal wage contracting depend also on the elasticity of labor supply. If the elasticity of labor supply is small, the welfare costs can be substantial. We also study how contract length might respond to changes in the environment. The results show that contract length may not be very sensitive to the size and the persistence of real and nominal shocks.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 30.

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Length: 19 pages
Date of creation: Jun 1994
Date of revision: 22 Jan 1996
Publication status: Forthcoming in Review of Economic Studies
Handle: RePEc:cre:crefwp:30

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Keywords: business cycles; nominal wage contracts; indexation;

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