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Testing for Contracting Effects on Employment

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  • Mark Bils

Abstract

I test the importance of wage rigidities from long-term contracts by observing how employment behaves when firms and workers recontract. If rigidities are important then we should observe employment adjusting after recontracting to undo movements in employment during the past contract that were excessive due to rigid wages. The data are for twelve manufacturing industries that display a strong bargaining pattern. I find that contract rigidities are important, causing considerably larger fluctuations in employment than would occur with flexible wages. By far the most striking case is in motor vehicles where long-term contracts much more than double the size of fluctuations in employment. I also examine the behavior of wage rates when new contracts are introduced. Wage growth does respond to employment growth during the prior contract in several of the industries; but these responses are not related to the pattern of employment responses across industries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3051.

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Date of creation: Jul 1989
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Publication status: published as Quarterly Journal of Economics, Vol. 106, no. 4 (1991): 1129-1156.
Handle: RePEc:nbr:nberwo:3051

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  1. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  2. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 11-44, January.
  3. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 854-71, August.
  4. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. 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.
  6. 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.
  7. 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.
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Cited by:
  1. Vivek Ghosal & Prakash Loungani, 1995. "Evidence on nominal wage rigidity from a panel of U.S. manufacturing industries," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 512, Board of Governors of the Federal Reserve System (U.S.).

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