renegotiation and the efficiency of investments in a long term relationship between two parties one party s threat of a unilateral violation of an initial contract may induce a renegotiation of the contract as a renegotiation may result in one party capturing some of the return from the other s investments this possibility may lead to underinvestment i show that if there is uncertainty associated with the outcome of a renegotiation and if players are risk averse there will be an interval for the initial contract so that it is not renegotiated by an appropriate choice of the initial contract underinvestment can thus be avoided

the inflation output trade off with downward wage rigidities the macroeconomic implications of downward nominal wage rigidi ties are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks a closed form solution for a long run phillips curve relates average output gap to average wage inflation it is virtually vertical at high inflation and flattens at low inflation macroeconomic volatility shifts the curve outwards and reduces output the results imply that stabilization policies play an important role and that optimal inflation may be positive and dif fer across countries with different macroeconomic volatility results are robust to relaxing the wage constraint for example when large idiosyncratic shocks arise jel e23 e24 e31 e63

strikes and holdouts in wage bargaining theory and data we develop a private information model of union contract negotiations in which disputes signal a firm s willingness to pay previous models have assumed that all labor disputes take the form of a strike yet a prominent feature of u s collective bargaining is the holdout negotiations often continue without a strike after the contract has expired production continues with workers paid according to the expired contract we analyze the union s decision to strike or hold out and highlight its importance to strike activity strikes are more likely to occur after a drop in the real wage or a decline in unemployment

holdouts and wage bargaining in the netherlands in this paper we give an exploratory empirical analysis of the relationship between holdouts and wage bargaining in the netherlands holdouts the negotiation periods between expiration of an old contract and the signing of a new contract appear to have a negative effect on the negotiated wage increase

downward nominal and real wage rigidity survey evidence from european firms downward nominal and real wage rigidity it has been well established that the wages of individual workers react little especially downwards to shocks that hit their employer this paper presents new evidence from a unique survey of firms across europe on the prevalence of downward wage rigidity in both real and nominal terms we analyse which firm level and institutional factors are associated with wage rigidity our results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models e g efficiency wage theory insider outsider theory we also find that wage rigidity depends on the labour market institutional environment collective bargaining coverage is positively related with downward real wage rigidity measured on the basis of wage indexation downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

real and nominal wage rigidities and the rate of inflation evidence from west german micro data the paper examines real and nominal wage rigidities we estimate a switching regime model in which the observed distribution of individual wage changes computed from west german register data for 1976 1997 is generated by simultaneous processes of real nominal or no wage rigidity and measurement error the fraction of workers facing wage increases that are due to nominal but mostly real wage rigidity is substantial the extent of real rigidity rises with inflation whereas the opposite holds for nominal rigidity overall the incidence of wage rigidity which accelerates unemployment growth is most likely minimized in an environment with moderate inflation

elections keynes bureaucracy and class explaining u s budget deficits 1961 1978 the determination of u s federal budget deficits and surpluses during a period of keynesian fiscal activism is modeled in light of relevant social science literatures rational choice emphases upon electoral manipulation of the economy and keynesian stabilization marxian emphases upon monopolization andfiscal control of labor militancy organizational decision theory emphases upon budgeting inertia and a number of additional thrusts from other literatures are supported by time series regression analyses of 1961 1978 surpluses deficits the final model is statistically well behaved analysis of so called high employment measures of discretionary surpluses deficits supports all interpretations requiring discretionary policy making but an indication of automatic stabilization emerges as well a focus upon executive policy making roles is suggested as one means to further theoretical integration of explanations of state macroeconomic policy

wage rigidity inflation and institutions we study the possible existence of downward nominal wage rigidity dnwr at wage growth rates different from zero in aggregate data even if dnwr prevails at zero for individual workers compositional effects might lead to falling aggregate wages while changes in relative wages combined with dnwr might lead to positive aggregate wage growth we explore industry data for 19 oecd countries over the 1971 2006 period we find evidence for a floor on nominal wage growth at 6 percent in the 1970s and 1980s at 1 percent in the 1990s and at 0 5 percent in the 2000s furthermore we find that dnwr is stronger in country years with strict employment protection legislation high union density centralized wage setting and high inflation

downward nominal wage rigidity evidence from canada 1901 1950 this paper tests for the presence of downward nominal wage rigidity in canadian wage data for 26 occupations in 38 cities from the first half of the 20th century the sample is of particular interest as it contains periods with average inflation rates that are close to zero as well as two sharp deflations results from a variety of different tests indicate that wage change distributions are consistent with the presence of downward nominal wage rigidity however for two subsamples containing sharp declines in output and prices estimates of the extent of downward nominal wage rigidity are much lower this suggests that downwards adjustments did occur during times of severe depression and deflation

nominal wage rigidity and the rate of inflation using the accurate and extensive data available in the uk new earnings survey this paper investigates the extent to which nominal wages are downwardly rigid and whether such rigidity interferes with necessary real wage adjustments when inflation is low despite the substantial numbers of individuals whose nominal wages fall from one year to the next we find that if long run inflation is one percent higher the number of individuals with negative real pay growth increases by around 1 4 percent this is controlling for the median and dispersion of the real wage change distribution

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

a letter to the editor on wage bargaining abstract the rubinstein perfect information alternating offers bargaining model is problematic when applied to wage negotiations a strike or any other industrial action is not an automatic consequence of a delay in reaching an agreement because production can continue normally also when negotiations take place this paper extends the rubinstein model to incorporate the choice of calling a strike and it is shown that in this model there is no longer a unique subgame perfect equilibrium and that strikes with a length in real time can occur in equilibrium

reaction functions optimization and politics modelling the political economy of macroeconomic policy a central concern of policy research is to disentangle the consequences of discretionary acts of authorities from the constraints under which they operate in economic policy research reaction functions a broad class of single equation models appear to offer insights into this problem however reaction functions share many of the pitfalls of the empirical use of optimizing models of policy and particular difficulties attach to disentangling the results of preferences from constraints using reaction functions in comparative research magnifies this problem even so the reaction function approach provides an attractive framework incorporating many of the traditional concerns of research into the politics of economic policy provided due caution is exercised in selecting hypotheses to test

nominal and real wage rigidity in a friction model abstract nominal wage adjustment in contract data is examined for evidence of nominal and real rigidities a friction model encompassing many special cases is used to analyse data from a rich inflation period

how rigid are nominal wages evidence and implications for germany many recent attempts to find evidence on downward nominal wage rigidity in micro data have suffered from problems such as composition bias and the effects of measurement error in this paper a model of proportional downward nominal wage rigidity is developed which avoids these problems by taking into account the determinants of wage changes and the measurement process that leads to observable earnings changes we find a high degree of downward nominal wage rigidity in german micro data its real implications for individual expected wage growth the aggregate wage level and equilibrium unemployment have marked effects for rates of inflation lower than 3 percent

union s threats and wage determination this paper considers local wage bargaining as a sequential game and focus es on how different rules of the game affect employment and equilibri um payment to workers and employers work to rule and other go slow t hreats lead to low employment while strike threats lead to high empl oyment an increase in the bargaining power of the union induces high er or unchanged equilibrium employment in the strike threat case whi le employment is reduced in the slow down case finally if all kinds of industrial actions are legal only one is credible which type de pends on the parameters of the model copyright 1988 by royal economic society

the costs of price stability downward nominal wage rigidity in europe in most european countries the prevailing terms of employment including the nominal wage can be changed only by mutual consent this legal feature gives workers a strategic advantage in wage negotiations when employers push for a nominal wage cut the upshot is a long run trade off between inflation and unemployment for low levels of inflation in spite of all agents being rational and with no expectational errors specifically downward nominal wage rigidity and excess unemployment at zero inflation are related to three factors the coverage of collective agreements the legal framework at contract renewal and the strictness of the employment protection legislation for non union workers

wage bargaining and nominal rigidities abstract delays in wage negotiations do not necessarily mean work stoppage production can continue under the terms of the old contract while the parties are bargaining holdout this holdout option is included in a strategic bargaining game in addition to strike and lock out threats integrating the bargaining model in a standard macroeconomic framework it turns out that holdout threats will prevail under certain circumstances in this case wages will be rigid in nominal terms so that an increase in aggregate nominal demand increases aggregate output

wage setting institutions and pay inequality in advanced industrial societies the distribution of pay differs significantly across countries and over time among advanced industrial societies in this paper institutional and political determinants of pay inequality are studied in sixteen countries from 1980 to 1992 the most important factor in explaining pay dispersion is the level of wage setting i e whether wages are set at the level of the individual the plant the industry or the entire private sector the impact of centralization is the same whether centralization occurs via collective bargaining or via government involvement in private sector wage setting the concentration of unions and the share of the labor force covered by collective bargaining agreements also matter after controlling for wage setting institutions other variables such as the governing coalition the size of government international openness and the supply of highly educated workers have little impact economic political and norm based explanations for the association of centralization with egalitarian outcomes are discussed

downward wage rigidities and optimal monetary policy in a monetary union this paper analyses the implications of heterogeneity in the type of downward wage rigidity nominal or real for optimal monetary policy in a monetary union with asymmetric wage adjustment costs indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks large common shocks may have sizeable and persistent effects on the intra union terms of trade whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness in response to asymmetric productivity shocks there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism

how strong is the macroeconomic case for downward real wage rigidity we explore the existence of downward real wage rigidity drwr at the industry level based on data from 19 oecd countries for the period 1973 1999 the results show that drwr compresses the distributions of industry wage changes overall as well as for specific geographical regions and time periods but there are not many real wage cuts that are prevented more important however drwr attenuates larger real wage cuts thus leading to higher real wages there is stronger evidence for downward nominal wage rigidity than for drwr real wage cuts are less prevalent in countries with strict employment protection legislation and high union density

the illusion of choice defense and welfare in advanced industrial democracies 1948 1978 research on the tendency of governments to trade off welfare spending for defense has generated diverse and often contradictory findings this study attempts to clarify the issue of trade offs by examining expenditure patterns since 1948 for the four major na to allies united states united kingdom federal republic of germany and france when viewed from the perspective of long term trends in shares of outlays trade offs are evident when short term changes in expenditure which are more germane to the potential for one spending category to benefit at the expense of the other are studied no pattern of trade off can be detected a three equation model is estimated to control for the variety of possible determining factors of public resource allocation in none of the four nations does a pattern of trade off emerge except in periods of wartime or postwar reconstruction these findings are consistent with the ability of governments to finance new spending through either increased taxes or larger budget deficits the growing disinclination to use these methods however suggests that the potential for trade offs has perhaps reappeared in the 1980s

commodity price shocks and child outcomes the 1990 cocoa crisis in cote d ivoire abstract we look at the drastic cut of the administered cocoa producer price in 1990 cote d ivoire and study to which extent cocoa producers children suffered from this severe aggregate shock in terms of school enrollment labor height stature and morbidity using precrisis 1985 88 and postcrisis 1993 data we propose a difference in difference strategy to identify the causal effect of the cocoa shock on child outcomes whereby we compare children of cocoa producing households and children of other farmers living in the same district or the same village this causal effect is shown to be rather strong for the four child outcomes we examine hence human capital investments are definitely procyclical in this context we also provide evidence of gender bias against young girls with respect to education and health care we finally argue that the difference in difference variations can be interpreted as private income effects likely to derive from tight liquidity constraints