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Extension of Labor Contracts and Optimal Backpay

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  • Danziger, Leif

    (Ben Gurion University)

Abstract

This paper explains why a union and a firm might settle on a contract duration that may later be extended and characterizes the optimal backpay for the holdout period. It is shown that the choice between concluding a shorter contract that may be extended and immediately concluding a longer contract depends on the prevalence of the different types of uncertainty in the economy. It is also shown that the optimal backpay reduces the negative impact of nominal uncertainty on a worker’s real income, but increases the worker’s exposure to idiosyncratic uncertainty.

Suggested Citation

  • Danziger, Leif, 2006. "Extension of Labor Contracts and Optimal Backpay," IZA Discussion Papers 2366, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2366
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    References listed on IDEAS

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    More about this item

    Keywords

    indexation; backpay; contract extension; contract duration; holdout;
    All these keywords.

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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