The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting : Endogenous Wage Contracting in a Multisector Economy

This paper shows how heterogeneity in wage setting and a link between nominal wage flexibility and goods-market competition arise in a multisector economy that is affected by aggregate and sector-specific shocks. Aggregate volatility increases the variance of real contract wages, whereas sectoral volatility increases the relative variance of real Walrasian wages. Given this trade-off, the prevalence of nominal wage contracting reflects both the relative volatility of aggregate versus sectoral disturbances and the overall degree of goods-market market competition. We find that these variables help explain the decline in unionization (a proxy for contracting) in the United States