Working Paper: NBER ID: w3051
Authors: Mark Bils
Abstract: I test the importance of wage rigidities from long-term contracts by observing how employment behaves when firms and workers recontract. If rigidities are important then we should observe employment adjusting after recontracting to undo movements in employment during the past contract that were excessive due to rigid wages. The data are for twelve manufacturing industries that display a strong bargaining pattern. I find that contract rigidities are important, causing considerably larger fluctuations in employment than would occur with flexible wages. By far the most striking case is in motor vehicles where long-term contracts much more than double the size of fluctuations in employment. I also examine the behavior of wage rates when new contracts are introduced. Wage growth does respond to employment growth during the prior contract in several of the industries; but these responses are not related to the pattern of employment responses across industries.
Keywords: wage rigidities; employment fluctuations; long-term contracts; manufacturing industries
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long-term contracts (L14) | wage rigidities (J31) |
| wage rigidities (J31) | employment adjustments after recontracting (M55) |
| employment adjustments after recontracting (M55) | larger fluctuations in employment (J69) |
| long-term contracts (L14) | larger fluctuations in employment (J69) |