Benabou, Roland and Claude Bismut, “Wage Bargaining and Staggered Contracts: Theory and Estimation,” CEPREMAP Working Paper, 8810 (June 1988).
Bryant, Ralph C., Dale W. Henderson, Gerald Holtham, Peter Hooper and Steven Symansky (eds.), Empirical Macroeconomics for Interdependent Economies, Brookings Institution (Washington D.C.: 1988).
Cortázar, René, “Wages in the Short Run: Chile, 1964–1981,” MIT doctoral dissertation, reproduced in Notas Técnicas CIEPLAN, 56, Santiago (April 1983).
Fischer, Stanley, “Long Term Contracts, Rational Expectations, and the Optimal Money Supply Rule,” Journal of Political Economy, Vol. 85, No. 1 (February 1977), pp. 191–205.
Lucas, Robert E., “Econometric Policy Evaluation: A Critique,” in The Phillips Curve and Labor Markets: Carnegie–Rochester Conference Series 1, edited by K. Brunner & A. Meltzer, North Holland (New York: 1976), pp. 19–46.
Murphy, Kevin M. & Robert H. Topel, “Estimation and Inference in Two–Step Econometric Models,” Journal of Business & Economic Statistics, Vol. 3, No. 4 (October 1985), pp. 370–9.
Taylor, John B., “Staggered Wage Setting in a Macro Model,” American Economic Review, Papers and Proceedings, Vol. 69 (May 1979), pp. 108–13.
Taylor, John B., “Aggregate Dynamics and Staggered Contracts,” Journal of Political Economy, Vol. 88, No. 1 (February 1980), pp. 1–23.
This paper is an edited translation of the document “Dinámica de Salarios y Contratos en Chile,” published in Spanish in Colección Estudios CIEPLAN, vol. 34 (Santiago: June 1992), pp. 5–30. The author is grateful to Eduardo Engel, Martín Kaufman, Florencio López de Silanes, Gregory Mankiw, Ricardo Paredes, Jeffrey Sachs, Lawrence Summers, and participants at seminars and workshops at the Central Bank of Chile, CIEPLAN, and Harvard University for helpful comments.
To illustrate the pervasiveness of the traditional approach, it should suffice to note that most of the applied macroeconomic models considered in a recent project, which included “a majority of the world’s leading specialists in empirical macroeconomics,” have a wage equation which is “very much a Phillips–curve relationship” (see Bryant and others, 1988, pp. 5, and the comments by Blanchard in that same reference, pp. 218).
Furthermore, their analysis assumes that the average inflation, unemployment and productivity implicitly expected in a given contract is independent of the contract’s length. That assumption, which eliminates one of the sources of identification of the different types of underlying contracts, is not necessary in this paper.
Although there are no formal statistics at this respect, officers at the Ministry of Labor who work with the basic data found it hard to think of exceptions to this rule when I asked for information on contract lengths.
It is not clear how to classify the remaining 7 percent of contracts, as they contemplate lump sum increases, indexation to the exchange rate, indexation to the CPI but in complicated ways, and other special formulas.
The same distribution weighted by the number of workers instead of the number of contracts is 10 percent, 76 percent, 3 percent, 7 percent, 2 percent, and 2 percent, respectively.
These figures underestimate the severity of the unemployment problem during those years, since they exclude the Special Employment Programs that where created for the unemployed during the recession. The source is the National Institute of Statistics
Note that this expression distinguishes between two kind of uncertainties at the time of signing the contract. One is that the negotiators are not sure about the actual average real wage that will result from setting an initial nominal wage (the left hand side). The other one is that they do not know what will happen in their relevant markets, and within the firm, during the contract’s lifetime (the right hand side).
This is an approximation, since the actual aggregate wage at the end of quarter may include, in part, adjustments according to inflation occurred during the same quarter. For example, if the monthly inflation rate and the distribution of wage negotiations are constants within every quarter, then the end–of–quarter increase in the aggregate wage due to the six month lagged indexation rule turns to be equal to (2πt−2+3πt−1+πt)/6. This approximation seems reasonable because only a small part of the relevant inflation rate is affected, and because inflation rates are serially correlated. Moreover, in the Chilean case, a large devaluation of the peso implemented in May 1982 provides a natural experiment that illustrates that this can be a good approximation even when large inflationary shocks occur. Indeed, while price inflation reacted immediately after that devaluation, jumping from 0.1 percent to 9.8 percent and 9.5 percent between the second and fourth quarter, wage increases lagged behind, going from −2.0 percent to 0.1 percent and 7.4 percent during the same quarters.
When this assumption was relaxed in the empirical estimation, the coefficients estimated below for the basic model (Table 3) changed very little. The F–test for equality on the distribution of wage negotiations during the year for contracts [8,2] and [4,4] implied an F–value equal to 0.004. For an F(3,28), this implies that the null hypothesis is accepted at p-values up to 99.96 percent.
I owe this observation, which turned to be important for the estimation of the distribution of wage negotiations during the year, to Jeffrey Sachs.
The appendix precise the definitions and sources of the other variables used in this paper. The data is available from the author upon request.
The reader interested on the determination of nominal wages in Chile during the 1960s and 1970s can consult Cortázar’s (1983) M.I.T. doctoral dissertation. He forcefully argues that one must distinguish several periods in the study of the determination of nominal wages, given the important institutional changes that occurred in those two decades.
The wage equations associated to the contracts discussed in this section can be derived straightforwardly by following the reasoning of the previous section. In the case of semiannual contracts these estimates assume that the fraction of contracts negotiated in a given quarter is equal to θ1+θ3 if the quarter is odd and θ2+θ4 if it is even.