Labor Contract Duration, Indexation, and Wage Adjustment: Interdependence and Inflation Propagation Mechanisms

Abstract

We study simultaneously the three main outcomes of collective bargaining negotiations, namely indexation, non-indexed wage adjustment, and contract duration. The wage adjustment equation accommodates varying degrees of wage indexation in the current and previous contracts. The elasticity of indexation, a latent variable, deals with both the incidence and intensity of wage indexation and links consistently with the wage equation. Duration, which may change between contracts, is shown to depend on indexed and non-indexed wage adjustment, obviating the need for expected inflation in the empirical duration equations of earlier work. Complex intra- and inter-contract inflation propagation mechanisms involve expected inflation and inflation uncertainty in an essential way. The model accounts for the secular doubling of contract duration and dramatic decrease in indexation and non-contingent wage adjustment.