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Long-Term Contracts as a Strategic Device

Author

Listed:
  • Nir Klein

    (Bank of Israel, Tel Aviv University)

Abstract

This paper shows that in a two-sector labor market, union choice between short and longterm nominal-wage contracts involves a trade-off between expected levels of inflation and unemployment and their variability. On the one hand, if the union sets long-term contracts, it can affect (future) competitive-sector wage contracts through its impact on inflationary expectations, and as a result it can achieve lower expected levels of inflation and unemployment. On the other hand, because long-term contracts introduce uncertainty regarding future productivity shocks, this alternative may lead to variability in inflation and unemployment from the union's perspective. This framework also evaluates the effect of union density on union choice. The analysis indicates that lower union density may lead to long-term contracts at low degree of central bank conservatism, and to short-term contracts at high degree of central bank conservatism.

Suggested Citation

  • Nir Klein, 2004. "Long-Term Contracts as a Strategic Device," Bank of Israel Working Papers 2004.16, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2004.16
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Contract length; labor market; union density; central bank conservatism;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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