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Efficient Wage Bargains Under Uncertain Supply and Demand

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  • Robert E. Hall
  • David M. Lilien

Abstract

Much recent thought has been devoted to the macroeconomic importance of the existence of wage contracts. Still, some puzzling features of the most conspicuous form of wage bargaining, that done formally by employers and labor unions, deserve further theoretical attention. Among these important features are: 1. Collective bargaining agreements are rarely contingent on outside events even though the parties have very imperfect knowledge of prospective economic conditions during the period of the contract. The only important exception is the indexing of wages to the cost of living. 2. Employers are permitted wide discretion in determining the level of employment when demand shifts unexpectedly. As employment varies, total compensation varies according to a formula established in the agreement. 3. Agreements are not permanent but are renegotiated on a regular cycle. 4. In the process of renegotiation, the current state of demand has little impact on the new wage schedule. On the other hand, current wages in other industries have an important influence. This feature especially has been denied or ignored by economic theorists even though it is a prominent part of the thinking of labor economists on wage determination.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0306.

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Date of creation: Dec 1978
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Publication status: published as Hall, Robert E. and Lilien, David M. "Efficient Wage Bargains under Uncertain Supply and Demand." The American Economic Review, Vol. 69, No. 5, (December 1979), pp. 868-879.
Handle: RePEc:nbr:nberwo:0306

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  1. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(1), pages 191-205, February.
  2. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  3. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 3(3), pages 305-316, July.
  4. Martin S. Feldstein, 1975. "The Importance of Temporary Layoffs: An Empirical Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 725-745.
  5. Phelps, Edmund S., 1977. "Indexation issues: A comment on the blinder and Fischer papers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 5(1), pages 149-168, January.
  6. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 37-50, January.
  7. Robert E. Hall, 1975. "The Rigidity of Wages and the Persistence of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 301-350.
  8. Grossman, Herschel I, 1977. " Risk Shifting and Reliability in Labor Markets," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 79(2), pages 187-209.
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