Extension of labor contracts and optimal backpay

Research output: Contribution to journalArticlepeer-review

Abstract

This paper explains why a union and a firm might settle on a contract duration that may later be extended and characterizes the optimal backpay for the holdout period. It is shown that the choice between concluding a shorter contract that may be extended and immediately concluding a longer contract depends on the prevalence of the different types of uncertainty in the economy. It is also shown that the optimal backpay reduces the negative impact of nominal uncertainty on a worker's real income, but increases the worker's exposure to idiosyncratic uncertainty.

Original languageEnglish
Pages (from-to)18-36
Number of pages19
JournalLabour Economics
Volume15
Issue number1
DOIs
StatePublished - 1 Feb 2008

Keywords

  • Backpay
  • Contract duration
  • Contract extension
  • Holdout
  • Indexation

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