A Synthesis of Contour and Flexible Wage Hypotheses

Abstract

A simple application of supply and demand analysis suggests changes in relative wages are explained primarily by changes in labor market tightness for different labor groups. In contrast, John Dunlop's description of the wage contour hypotheses states that wages and benefits are set by particular contours or sectors, and relative wage and benefit relationships are decisive to all compensation decisions.... Factors such as living costs, profits, product prices productivity and occasionally unemployment or skill shortages may play a role in addition to the central matter of relativity (emphasis added).' The essence of this view is that, in the short run, the wage structure is rigid across a variety of dimensions, such as occupation, industry, region, and union-nonunion sectors. Therefore, excess demand or supply for a particular labor subgroup may not affect relative wages.2 It might seem these two views of labor markets are in direct conflict. This impression is heightened by the fact the wage contour hypothesis has been either largely ignored or criticized by neoclassical labor economists.3 In this article I shall argue conflicts between flexible wage and contour hypotheses are not as serious as would first appear. While flexible wage theory grows out of the deductive framework of neoclassical economics, and the contour hypothesis is rooted in the inductive methodol-