Uncertainty and Labor Contracts

Monthly Labor Review, May 2000 | Go to article overview

Uncertainty and Labor Contracts


Theoretical analyses of the duration of labor contracts identify two factors that determine contract length: the cost of negotiation and uncertainty. Negotiation costs have a positive relationship with duration--the more costly the negotiation, the longer the parties want the agreement to last. "The effect of uncertainty in the economic environment on contract length, on the other hand, depends on the type of uncertainty involved, with nominal uncertainty predicted to be associated with contracts of shorter duration and real shocks associated with longer contracts," writes Kevin J. Murphy in the March issue of Labour Economics.

Murphy goes on to estimate a generalized-probit, simultaneous equation model using data derived from contacts in the Bureau of Labor Statistics collective bargaining agreement file. His dependent variables are contract length, indexation, and rate of wage change specified in the contract. In his analysis of the results pertaining to contract duration, Murphy notes that of these endogenous variables, wage change has a small but statistically significant negative impact on contract duration and on that of the exogenous variables not related to uncertainty; regional and industry-specific standards have the strongest influence.

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