Long-Term Contracts as a Strategic Device

Nir Klein ()
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Nir Klein: Bank of Israel, Tel Aviv University

No 2004.16, Bank of Israel Working Papers from Bank of Israel

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.

Keywords: Contract length; labor market; union density; central bank conservatism (search for similar items in EconPapers)
JEL-codes: E50 E58 J50 J51 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2004-11
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https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2004.16.pdf First version, 2004 (application/pdf)

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