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Testing For Contracting Effects On Employment

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Author Info

  • BILS, M.

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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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 174.

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Length: 31 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:roc:rocher:174

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: testing ; employment;

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  1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  2. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  3. 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.
  4. 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.
  5. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  6. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
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