Abstract
This paper uses a variety of data sources to document the effect of long-term contracts (LTCs) on wage dispersion. The paper first shows that LTCs are responsible for the decrease in wage dispersion observed as labor markets tighten; absent LTCs (as in most other advanced nations outside North America), this effect does not exist. The paper next examines the relationship between cost-of-living escalators (COLAs) and wage dispersion. COLAs are typically found only in those countries that rely on LTCs, although the incidence of COLAs in these nations is affected by inflation variability. Thus, in the United States, COLAs became much more prevalent in long-term contracts during the 1970s, which caused an increase in wage dispersion, particularly between the union and nonunion sectors. The paper concludes that, despite some suggestions that we ban LTCs and COLAs because of their perverse effects on wage dispersion and other economic outcomes, such a ban would be unwise in light of historically high levels of industrial strife in those nations that rely on these contractual devices.
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Jacoby, S.M., Pearl, M.Y. Labor market contracting and wage dispersion. Journal of Labor Research 9, 65–77 (1988). https://doi.org/10.1007/BF02685230
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DOI: https://doi.org/10.1007/BF02685230