The Equilibrium Distribution of Wage Settlements and Economic Stability

Abstract

Several authors recently have attempted to extend the Fischer contract model by allowing agents to endogenize the contract pattern (see e.g., Gray [1978] and Blanchard [1979]). Aside from the early literature on the pattern bargaining (Ross [1948], Rees and Hamilton [1963], and McGuire and Rapping [1968]), however, the only literature that endogenizes the pattern of negotiation is Fethke and Policano [1982], [1984]. Adopting a game theoretic framework in which each sector selects the contract length and the timing of its negotiation date so as to minimize the expected resource cost of contracting, they investigate the determinants and aggregate implications of alternative negotiation patterns in a twosector model with relative and aggregate disturbances. In this paper, contract length is assumed to be fixed and indexing provisions are ignored. Our attention is concentrated on the determinants of the timing of bargaining and the macroeconomic consequences of the resulting year-to-year distributions of wage settlements. These questions will be analyzed in a game theoretic framework where bargaining units choose the timing of bargaining and the authority chooses the money supply rules. Suppose that the distribution of wage settlements is uniform and that the monetary authority chooses optimum monetary policy such as that given by Fischer [1977]. Then the behaviors of the price level, output, and the real wage are symmetric between odd and even periods, and hence bargaining units are indifferent to the timing of bargaining. At the same time the authority minimizes the loss function given the distribution of wage settlements. Consequently, no player has an incentive to change his current strategy and the economy is in Nash equilibrium. In effect Fischer [1977] examines the properties of this equilibrium without providing a game theoretic treatment of the problem. We require answers to three questions: 1) is uniform distribution the only equilibrium of this labor contract economy; 2) if not, what is the optimal pattern of negotiation from the