Uncertainty and Labor Contract Durations

This paper provides an empirical investigation into the relationship between ex ante U.S. labor contract durations and uncertainty over the period 1970 to 1995. We construct measures of inflation uncertainty as well as aggregate nominal and real uncertainty. The results not only corroborate previous findings of an inverse relationship between contract duration and inflation uncertainty, but also document that this relationship extends to both measures of aggregate uncertainty. We also explore the robustness of this relationship to the various measures of inflation uncertainty that have appeared in the literature. We thank Nathaniel Baum-Snow for his excellent research assistance. We received helpful comments from seminar participants at the University of Missouri, New York University and Wharton. The views expressed in this paper are those of the individual authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Address correspondence to the authors at the Federal Reserve Bank of New York, Domestic Research Division, 33 Liberty Street, New York, NY 10045. Email: [email protected] or [email protected] 1The BLS defines a major union contract to be one which covers at least 1,000 workers. The ex ante duration as reported by the BLS is the number of months between the effective date of the contract and the planned expiration date. The ex post duration may differ from the ex ante durations due to early renegotiations or delayed settlements (which effectively extend the duration of the contract). For the remainder of this paper, we will refer to the ex ante duration simply as the contract duration.