Testing for Efficient Contracts in Unionized Labour Markets.

This paper addresses the design of empirical tests to distinguish between two competing explanations of wage and employment determination in unionized labour markets, the labour-demand and efficient-contract models. We argue that most of the tests employed are restrictive, propose an alternative non-nested approach, a central feature of which is the variation in the set of instrumental variables across the models, and provide an illustration of how it might be implemented, using data from the Work-place Industrial Relations Survey (WIRS) 1984 Panel File. The results demonstrate how the traditional approach can lead to inappropriate conclusions, and thereby emphasize the empirical importance of the specification of the instrumental variables. Copyright 1998 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research