Extension of Labor Contracts and Optimal Backpay

26 Pages Posted: 24 Oct 2006

See all articles by Leif Danziger

Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

Date Written: October 2006

Abstract

This paper explains why a union and a firm might settle on a contract duration that may later be extended and characterizes the optimal backpay for the holdout period. It is shown that the choice between concluding a shorter contract that may be extended and immediately concluding a longer contract depends on the prevalence of the different types of uncertainty in the economy. It is also shown that the optimal backpay reduces the negative impact of nominal uncertainty on a worker's real income, but increases the worker's exposure to idiosyncratic uncertainty.

Keywords: contract extension, contract duration, holdout, backpay, indexation

JEL Classification: J41

Suggested Citation

Danziger, Leif, Extension of Labor Contracts and Optimal Backpay (October 2006). Institute for the Study of Labor Discussion Paper No. 2366, Available at SSRN: https://ssrn.com/abstract=939503

Leif Danziger (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

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Israel
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HOME PAGE: http://www.econ.bgu.ac.il/facultym/danziger/main.htm

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