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The rise of goods-market competition and the fall of nominal wage contracting: endogenous wage contracting in a multisector economy

  • John V. Duca
  • David D. VanHoose

This paper shows how heterogeneity wage-setting and a link between nominal wage flexibility andg goods-market competition rise in a multisector economy that is affected by aggregate and sector-specific shocks. Aggregate volatility increases the variance of real contract wages, whereas sectoral volatility increase the relative variance of real Walrasian wages. Given this tradeoff, the prevalence of nominal wage contracting reflects both the relative volatility of aggregate versus sectoral disturbances and the overall degree of goods-market market competition. We find that these variables help explain the decline in unionization (a proxy for contracting in) the United States.

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File URL: http://dallasfed.org/assets/documents/research/papers/1998/wp9805.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 9805.

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Date of creation: 1998
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Handle: RePEc:fip:feddwp:98-05
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  1. Carl E. Walsh, 1994. "Is New Zealand's Reserve Bank Act of 1989 an optimal central bank contract?," Pacific Basin Working Paper Series 94-01, Federal Reserve Bank of San Francisco.
  2. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
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  4. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 169-84, May.
  5. Susanto Basu & John G. Fernald, 1994. "Constant returns and small markups in U.S. manufacturing," International Finance Discussion Papers 483, Board of Governors of the Federal Reserve System (U.S.).
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  7. Karni, Edi, 1983. "On Optimal Wage Indexation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 282-92, April.
  8. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  9. Carlson, John A. & Findlay, David W., 1992. "Relative prices, aggregate prices, and wage indexation," Journal of Economics and Business, Elsevier, vol. 44(1), pages 31-45, February.
  10. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  11. Duca, John V & VanHoose, David D, 1991. "Optimal Wage Indexation in a Multisector Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 859-67, November.
  12. Holland, A Steven, 1995. "Inflation and Wage Indexation in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 172-76, February.
  13. Maria W. Otoo, 1994. "Sectoral shocks, vacancies, and aggregate compensation determination," Working Paper Series / Economic Activity Section 150, Board of Governors of the Federal Reserve System (U.S.).
  14. Gray, Jo Anna & Kandil, Magda, 1991. "Is Price Flexibility Stabilizing? A Broader Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 1-12, February.
  15. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
  16. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  17. Duca, John V. & Vanhoose, David D., 1998. "The Rise of Goods-Market Competition and the Decline in Wage Indexation: A Macroeconomic Approach," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 579-598, July.
  18. Duca, John V, 1987. "The Spillover Effects of Nominal Wage Rigidity in a Multisector Economy: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 117-21, February.
  19. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September.
  20. Rau, Nicholas, 1985. "The Microeconomic Theory of the Trade Union: A Comment," Economic Journal, Royal Economic Society, vol. 95(378), pages 480-82, June.
  21. Waller, Christopher J, 1992. "The Choice of a Conservative Central Banker in a Multisector Economy," American Economic Review, American Economic Association, vol. 82(4), pages 1006-12, September.
  22. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  23. Vivek Ghosal & Prakash Loungani, 1995. "Evidence on nominal wage rigidity from a panel of U.S. manufacturing industries," International Finance Discussion Papers 512, Board of Governors of the Federal Reserve System (U.S.).
  24. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
  25. Ramagopal, K., 1994. "Another explanation for nominal wage rigidities: Uncertain marginal wage taxes," Journal of Economics and Business, Elsevier, vol. 46(2), pages 89-100, May.
  26. Freeman, Richard B, 1988. "Contraction and Expansion: The Divergence of Private Sector and Public Sector Unionism in the United States," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 63-88, Spring.
  27. Fischer, Stanley, 1977. "`Long-term contracting, sticky prices, and monetary policy' : A comment," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 317-323, July.
  28. Woglom, Geoffrey, 1990. "Systematic Risk and the Theory of Wage Indexation," The Journal of Business, University of Chicago Press, vol. 63(2), pages 217-37, April.
  29. Ashenfelter, Orley & Pencavel, John H, 1969. "American Trade Union Growth: 1900-1960," The Quarterly Journal of Economics, MIT Press, vol. 83(3), pages 434-48, August.
  30. John V. Duca & David D. VanHoose, 2000. "Has Greater Competition Restrained U.S. Inflation?," Southern Economic Journal, Southern Economic Association, vol. 66(3), pages 729=741, January.
  31. Neumann, George R & Rissman, Ellen R, 1984. "Where Have All the Union Members Gone?," Journal of Labor Economics, University of Chicago Press, vol. 2(2), pages 175-92, April.
  32. Ball, Laurence, 1988. "Is Equilibrium Indexation Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 299-311, May.
  33. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  34. Bob Mason & Peter Bain, 1993. "The Determinants of Trade Union Membership in Britain: A Survey of the Literature," ILR Review, Cornell University, ILR School, vol. 46(2), pages 332-351, January.
  35. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
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