The Impact of Controls on Wage Contract Duration

Abstract

Incomes policies invariably arouse considerable opposition. It is claimed that they are costly to administer, that, by tinkering with relative prices, they riddle the economy with inefficiencies and that they politicise economic life. It is also argued that where controls do have an impact on wage rates and prices, a point which is by no means universally conceded, agents are driven to (costly) behaviour designed to neutralise effective wage and price ceilings, e.g. wage drift and quality changes. It is fair to say, however, that most of the empirical work on incomes policies has been directed rather narrowly at the question of whether controls affect wage rates, earnings, or prices. Somewhat off the beaten track has been the interesting paper by Pencavel (I982), in which he argued that the existence of costs in revising wage rates calls for a distinction between the frequency and magnitude of wage revisions. Pencavel (I982) also argued that wage controls are sometimes directed toward postponing wage increases, in which case they affect the frequency of wage change, while at other times they specify permissible ceilings on wage increases designed to affect the magnitude of wage adjustments. However, even this paper deals with wage issues broadly defined. There has been little work done on the impact of controls on other aspects of labour market behaviour. The purpose of this paper is to explore the impact of Canada's recent experiment with controls' on wage contract duration. This long-neglected variable has received theoretical attention in a number of recent papers, including Fischer (I977), who argued that in a world of overlapping contracts, monetary policy is effective despite rational expectations, Gordon (I982), who considered the implications of contracting arrangements for wage flexibility, and Gray (I978) and Canzoneri (I980), who explored the impact of uncertainty on contract duration. An empirical paper by Christofides and Wilton (I983 b) confirmed Gray's (I978) and Canzoneri's (I980) conclusion that inflation uncertainty reduces the length of wage contracts. However, no one appears to have examined carefully the impact of controls on this important