Efficient Wage Bargains Under Uncertain Supply and Demand / Robert E. Hall, David M. Lilien.

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Hall, Robert E

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0306.Publication details: Cambridge, Mass. National Bureau of Economic Research 1978.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: Much recent thought has been devoted to the macroeconomic importance of the existence of wage contracts. Still, some puzzling features of the most conspicuous form of wage bargaining, that done formally by employers and labor unions, deserve further theoretical attention. Among these important features are: 1. Collective bargaining agreements are rarely contingent on outside events even though the parties have very imperfect knowledge of prospective economic conditions during the period of the contract. The only important exception is the indexing of wages to the cost of living. 2. Employers are permitted wide discretion in determining the level of employment when demand shifts unexpectedly. As employment varies, total compensation varies according to a formula established in the agreement. 3. Agreements are not permanent but are renegotiated on a regular cycle. 4. In the process of renegotiation, the current state of demand has little impact on the new wage schedule. On the other hand, current wages in other industries have an important influence. This feature especially has been denied or ignored by economic theorists even though it is a prominent part of the thinking of labor economists on wage determination.

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Previous	nber w0303 Towards An Understanding of the Real Effects and Costs of Inflation /	nber w0304 The Changing Cyclical Behavior of Wages and Prices: 1890-1976 /	nber w0305 The Percent Organized Wage (POW) Relationship for Union and for NonunionWorkers /	nber w0306 Efficient Wage Bargains Under Uncertain Supply and Demand /	nber w0307 Restriction of International Production: The Effects on the Domestic Economy /	nber w0308 Income and Race Differences in Children's Health /	nber w0309 How Elastic is The Demand for Labor? /	Next

December 1978.

Much recent thought has been devoted to the macroeconomic importance of the existence of wage contracts. Still, some puzzling features of the most conspicuous form of wage bargaining, that done formally by employers and labor unions, deserve further theoretical attention. Among these important features are: 1. Collective bargaining agreements are rarely contingent on outside events even though the parties have very imperfect knowledge of prospective economic conditions during the period of the contract. The only important exception is the indexing of wages to the cost of living. 2. Employers are permitted wide discretion in determining the level of employment when demand shifts unexpectedly. As employment varies, total compensation varies according to a formula established in the agreement. 3. Agreements are not permanent but are renegotiated on a regular cycle. 4. In the process of renegotiation, the current state of demand has little impact on the new wage schedule. On the other hand, current wages in other industries have an important influence. This feature especially has been denied or ignored by economic theorists even though it is a prominent part of the thinking of labor economists on wage determination.