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A Dynamic Contracting Model for Wages and Employment in three European Economies

  • de la Croix, David

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

  • Palm, Franz

    (University of Limburg, Faculty of Economics and Business Administration, Maastricht)

  • Pfann, Gerard

    (University of Limburg, Faculty of Economics and Business Administration, Maastricht)

We present a dynamic non-linear model for an efficient contracting between a firm facing adjustment costs on labour and a union having preferences which are subject to habit formation. The model’s first order necessary conditions are estimated for the French, the Dutch and the Belgian labour market. The estimation results turned out to be remarkably similar for the three countries. Two alternative hypotheses are also investigated : (i) a myopic behaviour of the union and (ii) a competitive labour market. The performance of the efficient contract model with a forward-looking union is found to be superior to that of the neo-classical model in explaining the dynamics of employment and wages in the three countries.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1993021.

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Length: 19
Date of creation: 01 Nov 1993
Date of revision:
Handle: RePEc:ctl:louvir:1993021
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  1. David Card, 1986. "Efficient Contracts with Costly Adjustment: Short-RUn Employment Determination for Airline Mechanics," NBER Working Papers 1931, National Bureau of Economic Research, Inc.
  2. PFANN, Gerard & PALM, Franz, 1992. "Asymmetric adjustment costs in non-linear labour demand models for the Netherlands and UK manufacturing sectors," CORE Discussion Papers 1992017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Strand, Jon, 1989. "Monopoly unions versus efficient bargaining : A repeated game approach," European Journal of Political Economy, Elsevier, vol. 5(4), pages 473-486.
  4. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  5. Lockwood, Ben & Manning, Alan, 1989. "Dynamic Wage-Employment Bargaining with Employment Adjustment Costs," Economic Journal, Royal Economic Society, vol. 99(398), pages 1143-58, December.
  6. de la Croix, David & Fagnart, Jean-Francois, 1995. "Underemployment of production factors in a forward-looking model," Labour Economics, Elsevier, vol. 2(2), pages 131-159, June.
  7. Boyer, M., 1981. "Rational Demand and Expenditures Patterns Under Habit Formation," Cahiers de recherche 8133, Universite de Montreal, Departement de sciences economiques.
  8. Alogoskoufis, George & Manning, Alan, 1991. "Tests of alternative wage employment bargaining models with an application to the UK aggregate labour market," European Economic Review, Elsevier, vol. 35(1), pages 23-37, January.
  9. Paz Espinosa, Maria & Rhee, Changyong, 1989. "Efficient Wage Bargaining as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 565-88, August.
  10. Osano, Hiroshi & Inoue, Tohru, 1991. "Testing between Competing Models of Real Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 669-88, August.
  11. Pashardes, Panos, 1986. "Myopic and Forward Looking Behavior in a Dynamic Demand System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 387-97, June.
  12. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  13. Graafland, J J, 1991. "On the Causes of Hysteresis in Long-Term Unemployment in the Netherlands," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(2), pages 155-70, May.
  14. Brown, James N & Ashenfelter, Orley, 1986. "Testing the Efficiency of Employment Contracts," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S40-S87, June.
  15. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  16. Frank, Robert H. & Hutchens, Robert M., 1993. "Wages, seniority, and the demand for rising consumption profiles," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 251-276, August.
  17. MaCurdy, Thomas E & Pencavel, John H, 1986. "Testing between Competing Models of Wage and Employment Determination in Unionized Markets," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S3-S39, June.
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