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Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts

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  • David Card

    (Princeton University)

Abstract

This paper presents new evidence on the relevance of nominal contracting models for employment determination in long term union contracts. A key aspect of these contracts, much emphasized in the macroeconomics literature, is the predetermined nature of nominal wages. Real wage rates therefore contain unanticipated components that reflect unexpected changes in prices and the degree of indexation in the contract. The empirical analysis, based on a sample of 1300 indexed and non-indexed contracts from the Canadian manufacturing sector, indicates that unexpected real wage changes are associated with systematic employment responses in the opposite direction. I conclude that nominal contracting provisions play a potentially important role in the cyclical properties and persistence of employment in the union sector.

Suggested Citation

  • David Card, 1988. "Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts," Working Papers 612, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:232
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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