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

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References

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  1. Gu, Wulong & Kuhn, Peter, 1998. "A Theory of Holdouts in Wage Bargaining," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 428-49, June.
  2. Peter Cramton & Joseph S. Tracy, 1994. "The Determinants of U.S. Labor Disputes," Papers of Peter Cramton 94jole, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  3. Christofides, Louis N, 1990. "The Interaction between Indexation, Contract Duration and Non-contingent Wage Adjustment," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 57(227), pages 395-409, August.
  4. Robert Rich & Joseph Tracy, 2004. "Uncertainty and Labor Contract Durations," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 270-287, February.
  5. van Ours, Jan C. & van de Wijngaert, Rob F., 1996. "Holdouts and wage bargaining in The Netherlands," Economics Letters, Elsevier, Elsevier, vol. 53(1), pages 83-88, October.
  6. Malcomson, J.M., 1997. "Contracts, hold-up and labor markets," Discussion Paper Series In Economics And Econometrics 9703, Economics Division, School of Social Sciences, University of Southampton.
  7. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
  8. 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.
  9. 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.
  10. van Ours, Jan C., 1999. "The cyclical behavior of holdout durations," Economics Letters, Elsevier, Elsevier, vol. 62(3), pages 365-370, March.
  11. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November.
  12. 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.
  13. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, Elsevier, vol. 38(5), pages 1021-1039, May.
  14. Leif Danziger & Shoshana Neuman, 2005. "Delays in Renewal of Labor Contracts: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 23(2), pages 341-372, April.
  15. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 389-406, June.
  16. Ernst Fehr & Armin Falk, 2003. "Wage Rigidity in a Competitive Incomplete Contract Market," Labor and Demography, EconWPA 0305001, EconWPA.
  17. Christofides, L. & Peng, C., 2004. "Contract Duration and Indexation in a Period of Real and Nominal Uncertainty," Working Papers, University of Guelph, Department of Economics and Finance 2004-3, University of Guelph, Department of Economics and Finance.
  18. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 251-70, February.
  19. Houba, Harold & Bolt, Wilko, 2000. "Holdouts, backdating and wage negotiations," European Economic Review, Elsevier, Elsevier, vol. 44(9), pages 1783-1800, October.
  20. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(1), pages 1-18, February.
  21. Danziger, Leif, 1992. "On the Prevalence of Labor Contracts with Fixed Duration," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 195-206, March.
  22. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
  23. Murphy, Kevin J., 2000. "What effect does uncertainty have on the length of labor contracts?," Labour Economics, Elsevier, Elsevier, vol. 7(2), pages 181-201, March.
  24. Danziger, Leif, 1995. "Contract Reopeners," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 13(1), pages 62-87, January.
  25. Danziger, Leif, 1988. "Real Shocks, Efficient Risk Sharing, and the Duration of Labor Contracts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(2), pages 435-40, May.
  26. Wallace, Frederick H, 2001. "The Effects of Shock Size and Type on Labor-Contract Duration," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(3), pages 658-81, July.
  27. Wallace, Frederick H. & Blanco, Herminio, 1991. "The effects of real and nominal shocks on union-firm contract duration," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(3), pages 361-380, June.
  28. Cramton, Peter C & Tracy, Joseph S, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 100-121, March.
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