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Uncertainty and Labor Contract Durations

  • Robert Rich

    (Federal Reserve Bank of New York)

  • Joseph Tracy

    (Federal Reserve Bank of New York)

This paper provides an empirical investigation into the relationship between uncertainty and ex ante U.S. labor contract durations over the period 1970 to 1995. Using a structural identification of aggregate demand and aggregate supply shocks, we find that desired contract durations are shorter during periods of heightened nominal or real uncertainty. This evidence supports the view that labor contract durations respond endogenously to the aggregate uncertainty prevailing at the time they are negotiated, but suggests that risk-sharing concerns are not paramount. The analysis also considers several measures of inflation uncertainty that have appeared in the literature. The results generally corroborate previous findings of an inverse relationship between desired contract durations and the level of inflation uncertainty. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/003465304323023804
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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 86 (2004)
Issue (Month): 1 (February)
Pages: 270-287

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Handle: RePEc:tpr:restat:v:86:y:2004:i:1:p:270-287
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  1. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-59, July.
  2. Schnell, John F & Gramm, Cynthia L, 1987. "Learning by Striking: Estimates of the Teetotaler Effect," Journal of Labor Economics, University of Chicago Press, vol. 5(2), pages 221-41, April.
  3. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September.
  4. David Card, 1984. "An Empirical Model of Wage Indexation Provisions in Union Contracts," NBER Working Papers 1388, National Bureau of Economic Research, Inc.
  5. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  6. Canzoneri, Matthew B., 1980. "Labor contracts and monetary policy," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 241-255, April.
  7. Levi, Maurice D & Makin, John H, 1980. "Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 70(5), pages 1022-27, December.
  8. Christofides, Louis N, 1985. "The Impact of Controls on Wage Contract Duration," Economic Journal, Royal Economic Society, vol. 95(377), pages 161-68, March.
  9. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May.
  10. Peter Cramton & Morley Gunderson & Joseph Tracy, 1999. "The Effect of Collective Bargaining Legislation on Strikes and Wages," Papers of Peter Cramton 99res, University of Maryland, Department of Economics - Peter Cramton, revised 30 Jul 1998.
  11. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November.
  12. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 77-146.
  13. Pagan, A R & Hall, A D & Trivedi, P K, 1983. "Assessing the Variability of Inflation," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 585-96, October.
  14. Ronald G. Ehrenberg & Leif Danziger & Gee San, 1982. "Cost-of-Living Adjustment Clauses in Union Contracts," NBER Working Papers 0998, National Bureau of Economic Research, Inc.
  15. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  16. Cousineau, Jean-Michel & Lacroix, Robert & Bilodeau, Danielle, 1983. "The Determination of Escalator Clauses in Collective Agreements," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 196-202, May.
  17. Kevin J. Murphy, 1992. "Determinants of Contract Duration in Collective Bargaining Agreements," ILR Review, Cornell University, ILR School, vol. 45(2), pages 352-365, January.
  18. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
  19. Mullineaux, Donald J, 1980. "Unemployment, Industrial Production, and Inflation Uncertainty in the United States," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 163-69, May.
  20. Wallace, Frederick H, 2001. "The Effects of Shock Size and Type on Labor-Contract Duration," Journal of Labor Economics, University of Chicago Press, vol. 19(3), pages 658-81, July.
  21. repec:nbr:nberre:0126 is not listed on IDEAS
  22. Rich, R W & Raymond, J E & Butler, J S, 1992. "The Relationship between Forecast Dispersion and Forecast Uncertainty: Evidence from a Survey Data-ARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 131-48, April-Jun.
  23. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  24. Wallace Hendricks & Larry M. Kahn, 1983. "Cost-of-living clauses in union contracts: Determinants and effects," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 36(3), pages 447-460, April.
  25. Kevin J. Murphy, 1992. "Determinants of contract duration in collective bargaining agreements," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 45(2), pages 352-365, January.
  26. Danziger, Leif, 1988. "Real Shocks, Efficient Risk Sharing, and the Duration of Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 435-40, May.
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