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Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts

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Author Info
David Card

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Abstract

This paper presents new microeconometric evidence on the relevance of nominal contracting for employment determination in the unionized sector. Real wages in long term union contracts contain an unanticipated component that reflects unexpected changes in prices and the degree of indexation. These unexpected wage components provide a convenient tool for separating the causal effects of wages on employment from other endogenous sources of employment and wage variation. The empirical analysis of employment and wage outcomes among collective agreements in the Canadian manufacturing sector reveals that employment and wages are only weakly related. When unexpected changes in real wages are used as an instrumental variable for the contract wage, however, employment is consistently negatively related to wages. The results imply that the institutional structure of wage determination has important effects on the cyclical characteristics and persistence of employment changes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2768.

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Date of creation: Nov 1988
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Handle: RePEc:nbr:nberwo:2768

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ashenfelter, Orley C & Card, David, 1982. "Time Series Representations of Economic Variables and Alternative Models of the Labour Market," Review of Economic Studies, Blackwell Publishing, vol. 49(5), pages 761-81, Special I. [Downloadable!] (restricted)
    Other versions:
  2. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  3. John Abowd, 1987. "Collective Bargaining and the Division of the Value of the Enterprise," Working Papers 598, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  4. repec:fth:prinin:222 is not listed on IDEAS
  5. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January. [Downloadable!] (restricted)
  6. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May. [Downloadable!] (restricted)
  7. Douglas Holtz-Eakin & Whitney Newey & Harvey Rosen, 1987. "Wages and Hours: Estimating Vector Autoregressions with Panel Data," Working Papers 602, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  8. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February. [Downloadable!] (restricted)
  9. Kennan, John, 1988. "An Econometric Analysis of Fluctuations in Aggregate Labor Supply and Demand," Econometrica, Econometric Society, vol. 56(2), pages 317-33, March. [Downloadable!] (restricted)
  10. MaCurdy, Thomas E & Pencavel, John H, 1986. "Testing between Competing Models of Wage and Employment Determination in Unionized Markets," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S3-S39, June. [Downloadable!] (restricted)
  11. Robert E. Hall, 1980. "Employment Fluctuations and Wage Rigidity," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1980-1), pages 91-142. [Downloadable!]
  12. Louis N. Christofides & Andrew J. Oswald, 1991. "Efficient and Inefficient Employment Outcomes: A Study Based on Canadian Data," NBER Working Papers 3648, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Brown, James N & Ashenfelter, Orley, 1986. "Testing the Efficiency of Employment Contracts," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S40-S87, June. [Downloadable!] (restricted)
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  14. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Hamermesh, Daniel S., 1987. "The demand for labor in the long run," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 8, pages 429-471 Elsevier. [Downloadable!] (restricted)
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  16. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April. [Downloadable!] (restricted)
  17. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
    Other versions:
  18. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November. [Downloadable!] (restricted)
  19. Bils, M., 1989. "Testing For Contracting Effects On Employment," RCER Working Papers 174, University of Rochester - Center for Economic Research (RCER).
    Other versions:
  20. David Card, 1988. "Strikes and Wages: A Test of a Signalling Model," NBER Working Papers 2550, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. L Christofides & A Oswald, 1991. "Efficient and Inefficient Employment Outcomes: A Study Based on Canadian Contract Data," CEP Discussion Papers dp0041, Centre for Economic Performance, LSE.
  22. repec:fth:prinin:218 is not listed on IDEAS
  23. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February. [Downloadable!] (restricted)
  24. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December. [Downloadable!] (restricted)
  25. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 854-71, August. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Blanchard, Olivier & Katz, Lawrence F, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter. [Downloadable!] (restricted)
    Other versions:
  2. Giovanni Olivei & Silvana Tenreyro, 2007. "The Timing of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 97(3), pages 636-663, June. [Downloadable!]
    Other versions:
  3. Jovanovic, B. & Ueda, M., 1998. "Stock-Returns and Inflation in a Principal-Agent Economy," Working Papers 98-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  4. Jovanovic, B. & Ueda, M., 1996. "Contracts and Money," Working Papers 96-23, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  5. Lionel Fontagne & Daniel Mirza, 2001. "International Trade and Rent Sharing in Developed and Developing countries," Working Papers 2001-09, CEPII research center. [Downloadable!]
    Other versions:
  6. Erica L. Groshen & Mark E. Schweitzer, 1996. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Staff Reports 9, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  7. Kate Bishop & Tomasz Mickiewicz, 2003. "While Labour Hoarding May Be Over, Insiders’ Control Is Not. Determinants Of Employment Growth In Polish Large Firms, 1996-2001," William Davidson Institute Working Papers Series 2003-593, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  8. Janet Currie Neelin, 1989. "What Do (Public Sector) Unions Do? Wage and Employment Determination Among Ontario Public School Teachers," UCLA Economics Working Papers 542, UCLA Department of Economics. [Downloadable!]
  9. Anna Iara & Iulia Traistaru, 2004. "How Flexible are Wages in EU Accession Countries?," ERSA conference papers ersa04p191, European Regional Science Association. [Downloadable!]
    Other versions:
  10. Lawrence H. Summers & Jonathan Gruber & Rodrigo Vergara, 1992. "Taxation and the Structure of Labor Markets: The Case of Corporatism," NBER Working Papers 4063, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Evan F. Koenig, 1995. "Optimal monetary policy in an economy with sticky nominal wages," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 24-31. [Downloadable!]
  13. Martyn Andrews & Alan Harrison, . "Testing for Efficient Contracts in Unionized Labour Market," Canadian International Labour Network Working Papers 12, McMaster University. [Downloadable!]
  14. David G. Blanchflower & Andrew J. Oswald, 1990. "The Wage Curve," NBER Working Papers 3181, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Paul Heidhues, 2000. "Employers’ Associations, Industry-wide Unions, and Competition," CIG Working Papers FS IV 00-11, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  16. Bill Collier, 2000. "The UK Wage Curve: New Evidence from the British Household Panel Survey," Studies in Economics 0010, Department of Economics, University of Kent. [Downloadable!]
  17. Louis N. Christofides & Andrew J. Oswald, 1991. "Efficient and Inefficient Employment Outcomes: A Study Based on Canadian Data," NBER Working Papers 3648, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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