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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
    1. Kevin J. Murphy, 1992. "Determinants of Contract Duration in Collective Bargaining Agreements," ILR Review, Cornell University, ILR School, vol. 45(2), pages 352-365, January.
    2. Cukierman, Alex & Lippi, Francesco, 1999. "Central bank independence, centralization of wage bargaining, inflation and unemployment:: Theory and some evidence," European Economic Review, Elsevier, vol. 43(7), pages 1395-1434, June.
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    4. repec:bla:econom:v:57:y:1990:i:227:p:395-409 is not listed on IDEAS
    5. Nir Klein, 2004. "Collective Bargaining and Its Effect on the Central Bank Conservatism: Theory and Some Evidence," Bank of Israel Working Papers 2004.07, Bank of Israel.
    6. Wallace, Frederick H. & Blanco, Herminio, 1991. "The effects of real and nominal shocks on union-firm contract duration," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 361-380, June.
    7. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, April.
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    9. 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.
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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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