Efficient Wage Bargains Under Uncertain Supply and Demand

Abstract

This paper examines efficient arrangements between employers and workers for handling shifts in the demand for and supply of labor.Efficiency is achieved when the marginal revenue product of labor equals the marginal value of time.The problem is to set up contractual provisions so that employment can vary as supply and demand change.Where the shifts are observable and outside the control of the parties to the contract, a fully contingent contract can achieve efficiency.However, these conditions are rarely met in practice and contingent labor contracts, apart from cost of living escalators, are almost never found.The paper investigates non-contingent contracts that are efficient or approximately efficient.It shows the impossibility of full efficiency in the face of shifts in both supply and demand and the feasibility of efficiency when only demand or only supply shift.It argues that very nearly efficient contracts are possible when demand shifts are much larger than supply shifts, and shows that the type of contract appropriate for this case bears strong resemblance to collective bargaining agreements in the United States.In particular, it shows that the current state of demand should be completely irrelevant in the process of renegotiating a labor contract.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 218 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.