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Extension of Labor Contracts and Optimal Backpay

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  • Danziger, Leif

    ()
    (Ben Gurion University)

Abstract

This paper explains why a union and a firm might settle on a contract duration that may later be extended and characterizes the optimal backpay for the holdout period. It is shown that the choice between concluding a shorter contract that may be extended and immediately concluding a longer contract depends on the prevalence of the different types of uncertainty in the economy. It is also shown that the optimal backpay reduces the negative impact of nominal uncertainty on a worker’s real income, but increases the worker’s exposure to idiosyncratic uncertainty.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2366.

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Length: 26 pages
Date of creation: Oct 2006
Date of revision:
Publication status: published in: Labour Economics, 2008, 15 (1), 18-36
Handle: RePEc:iza:izadps:dp2366

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Related research

Keywords: indexation; backpay; contract extension; contract duration; holdout;

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References

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  1. Dye, Ronald A, 1985. "Optimal Length of Labor Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 251-70, February.
  2. Wallace, Frederick H. & Blanco, Herminio, 1991. "The effects of real and nominal shocks on union-firm contract duration," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 361-380, June.
  3. Robert Rich & Joe Tracy, 2000. "Uncertainty and labor contract durations," Staff Reports 106, Federal Reserve Bank of New York.
  4. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May.
  5. Gu, Wulong & Kuhn, Peter, 1998. "A Theory of Holdouts in Wage Bargaining," American Economic Review, American Economic Association, vol. 88(3), pages 428-49, June.
  6. van Ours, Jan C. & van de Wijngaert, Rob F., 1996. "Holdouts and wage bargaining in The Netherlands," Economics Letters, Elsevier, vol. 53(1), pages 83-88, October.
  7. James M. Malcomson, 1997. "Contracts, Hold-Up, and Labor Markets," Journal of Economic Literature, American Economic Association, vol. 35(4), pages 1916-1957, December.
  8. Christofides, L. & Peng, C., 2004. "Contract Duration and Indexation in a Period of Real and Nominal Uncertainty," Working Papers 2004-3, University of Guelph, Department of Economics and Finance.
  9. Christofides, L.N., 1989. "The Interaction Between Indexation, Contract Duration And Non-Contengent Wage Adjustment," Working Papers 1989-13, University of Guelph, Department of Economics and Finance.
  10. Leif Danziger & Shoshana Neuman, 2005. "Delays in Renewal of Labor Contracts: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 341-372, April.
  11. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
  12. Harris, Milton & Holmstrom, Bengt, 1987. "On the Duration of Agreements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 389-406, June.
  13. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography 0305001, EconWPA.
  14. Ronald G. Ehrenberg & Leif Danziger & Gee San, 1982. "Cost-of-Living Adjustment Clauses in Union Contracts," NBER Working Papers 0998, National Bureau of Economic Research, Inc.
  15. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November.
  16. Houba, Harold & Bolt, Wilko, 2000. "Holdouts, backdating and wage negotiations," European Economic Review, Elsevier, vol. 44(9), pages 1783-1800, October.
  17. Murphy, Kevin J., 2000. "What effect does uncertainty have on the length of labor contracts?," Labour Economics, Elsevier, vol. 7(2), pages 181-201, March.
  18. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
  19. Cramton, Peter C & Tracy, Joseph S, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," American Economic Review, American Economic Association, vol. 82(1), pages 100-121, March.
  20. Danziger, Leif, 1995. "Contract Reopeners," Journal of Labor Economics, University of Chicago Press, vol. 13(1), pages 62-87, January.
  21. Cramton, Peter C & Tracy, Joseph S, 1994. "The Determinants of U.S. Labor Disputes," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 180-209, April.
  22. van Ours, Jan C., 1999. "The cyclical behavior of holdout durations," Economics Letters, Elsevier, vol. 62(3), pages 365-370, March.
  23. Kevin J. Murphy, 1992. "Determinants of contract duration in collective bargaining agreements," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 45(2), pages 352-365, January.
  24. Ours, J.C. van, 1999. "The cyclical behavior of holdout durations," Open Access publications from Tilburg University urn:nbn:nl:ui:12-80320, Tilburg University.
  25. 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.
  26. Danziger, Leif, 1992. "On the Prevalence of Labor Contracts with Fixed Duration," American Economic Review, American Economic Association, vol. 82(1), pages 195-206, March.
  27. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
  28. 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.
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