Major Provisions of Labour Contracts and Their Theoretical Coherence

50 Pages Posted: 27 Apr 2006

See all articles by Louis N. Christofides

Louis N. Christofides

University of Cyprus - Department of Economics; University of Guelph; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); IZA Institute of Labor Economics

Amy Peng

Ryerson University, Faculty of Arts - Department of Economics

Date Written: April 2006

Abstract

Theoretical work on indexation and contract duration suggests no role for the expected rate of inflation in equations explaining these variables. Yet, stand-alone or two-equation studies of indexation and contract duration often report that this variable is statistically significant. We study a wider econometric system which includes, in addition, non-contingent wage adjustment. This third, jointly dependent, variable and its nominal anchor (the expected rate of inflation) play a role in the duration and indexation decisions and offer a context within which earlier findings can be understood. In this three-equation system, the wage equation accommodates complex mechanisms through which price inflation feeds into wage adjustment both within and across contracts. The elasticity of indexation is modelled as a latent variable, supporting consideration of both the incidence and the intensity of indexation and linking consistently with the wage equation. In our results, the expected rate of inflation has no role in the duration equation and only a minor one in the elasticity of indexation equation. These findings are more consistent with received theory but they also suggest that more complex models involving all three variables and the sequence of contracts signed by a bargaining pair are needed.

Keywords: contracts, duration, indexation, wage adjustment, simultaneity

JEL Classification: E31, J41, J50

Suggested Citation

Christofides, Louis N. and Peng, Amy, Major Provisions of Labour Contracts and Their Theoretical Coherence (April 2006). CESifo Working Paper Series No. 1700. Available at SSRN: https://ssrn.com/abstract=899249

Louis N. Christofides (Contact Author)

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus
357 22 892448 (Phone)
357 22 892432 (Fax)

University of Guelph ( email )

Guelph, Ontario
Canada
001-519-763-8497 (Phone)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Amy Peng

Ryerson University, Faculty of Arts - Department of Economics ( email )

Toronto M5B 2K3, Ontario
Canada

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