Working Paper: NBER ID: w0985
Authors: John B. Taylor
Abstract: This paper examines the role of union wage contracts in the persistence of inflation, and the implication of these contracts for the problem of disinflation in the United States. A quantitative model of overlapping con- tracts explicitly oriented toward the major union sector is developed. The model takes account of expectations of future wage, price, and employment conditions as in more aggregated models that have been used in macroeconomic research. In addition, the distribution of workers according to contract length as well as deferred wage increases and escalator clauses are explicitly used in the model. The main aim of the model is to determine the constraints which these contracts impose on disinflation paths. The model indicates that the maximum speed of disinflation is extremely slow in the early phases -- if a rise in unemployment is to be avoided -- but increases considerably before the new lower rate of inflation is reached. The disinflation path is considerably slower than that observed after hyperinflation periods. However, the existence of a path of inflation reduction raises questions about whether the institution of union wage con- tracts is really the direct cause of costly disinflations, or whether their influence works indirectly by raising credibility problems about a monetary disinflation.
Keywords: Union Wage Contracts; Disinflation; Inflation Persistence; Economic Fluctuations
JEL Codes: E24; E31; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| overlapping wage contracts (J31) | maximum speed of disinflation (E31) |
| contract length (K12) | disinflation speed (E31) |
| deferred wage increases and escalator clauses (J33) | disinflation path (E31) |
| union wage contracts (J51) | credibility issues regarding monetary disinflation (E31) |
| maximum speed of disinflation (E31) | new lower inflation rates (E31) |