An Examination of Wage Behaviour in Macroeconomic Models with Long-Term Contracts.

Are long-term contracts equivalent to a series of shorter-term contracts except for the informational sets available? This paper argues that the wage equations in many macroeconomic models with labor contracts imply a positive answer to the above question. An empirical examination of Canadian contract wage data rejects the above hypothesis. The paper argues that real economic conditions at the time contracts are signed have a greater impact on wage settlements than do conditions that are expected to exist in the future. This alternative hypothesis is generally supported by the data.