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Extension of Labor Contracts and Optimal Backpay

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Author Info
Leif Danziger () (Ben Gurion University, Central European University and IZA Bonn)

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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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Publisher 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:
Handle: RePEc:iza:izadps:dp2366

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

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Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. 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)
  2. 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. [Downloadable!] (restricted)
  3. Houba, Harold & Bolt, Wilko, 2000. "Holdouts, backdating and wage negotiations," European Economic Review, Elsevier, vol. 44(9), pages 1783-1800, October. [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. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!]
    Other versions:
  7. 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.
  8. Christofides, Louis N. & Peng, Chen, 2006. "Contract duration and indexation in a period of real and nominal uncertainty," Labour Economics, Elsevier, vol. 13(1), pages 61-86, February. [Downloadable!] (restricted)
    Other versions:
  9. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 106-134, February. [Downloadable!] (restricted)
    Other versions:
  10. Robert Rich & Joseph Tracy, 2004. "Uncertainty and Labor Contract Durations," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 270-287, 01. [Downloadable!] (restricted)
    Other versions:
  11. 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.
  12. Christofides, Louis N, 1990. "The Interaction between Indexation, Contract Duration and Non-contingent Wage Adjustment," Economica, London School of Economics and Political Science, vol. 57(227), pages 395-409, August. [Downloadable!] (restricted)
    Other versions:
  13. 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. [Downloadable!] (restricted)
    Other versions:
  14. 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. [Downloadable!] (restricted)
  15. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May. [Downloadable!] (restricted)
  16. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April. [Downloadable!] (restricted)
  17. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
    Other versions:
  19. 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)
  20. 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)
  21. 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. [Downloadable!] (restricted)
  22. van Ours, Jan C., 1999. "The cyclical behavior of holdout durations," Economics Letters, Elsevier, vol. 62(3), pages 365-370, March. [Downloadable!] (restricted)
  23. 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. [Downloadable!] (restricted)
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