The growth cycle and labour contract length

This paper extends the growth cycle model a la Goodwin (1967) by introducing the risk-averse behaviour of the agents and a consequent positive correlation between wages and profitability. This extension is motivated by the impressive evidence on the joint role played by aggregate unemployment and lagged profitability in explaining wage determination. The effects of this extension in the growth cycle context are analysed, and the global and local dynamic effects of the union contract length are investigated. The following somewhat unexpected stabilisation policy rules have been argued: 1) in contrast with conventional wisdom the "local" stability criterion would suggest reducing the average length of labour contracts; 2) "global" considerations, however, could suggest a completely opposite policy, in the case in which the policy-makers prefer an almost globally stable fluctuation (resistant to strong shocks) to a small stable "corridor" (destroyed by very small shocks). Finally the deterministic business cycles triggered by the centralised contract length with risk-averse agents shown in this paper propose a role of uncertainty in determining economic fluctuations which somewhat differs from the manifestations of exogenous shocks to a fundamentally stable equilibrium proposed by Real Business Cycle theorists.