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Wage and Employment Patterns in Long-Term Contracts When Labor Is Quasi-Fixed

This paper presents evidence on predictable patterns that occur in wages and employment within the duration of labor contracts in U.S. manufacturing. Wage rates are very predictably front-loaded-wage growth is concentrated at the beginning of contracts. More surprisingly, employment, on average, grows fastest in the first year of contracts. Results of contracting in the presence of dynamic labor demand are derived. I find that wages should predictably decline during contracts because unions use long-term contracts to commit to lower wage rates in future periods in order to increase employment demand today. Employment predictably increased during contracts; but these increases are small both because of the costs of adjusting employment and because firms have incentive to reduce employment at the end of contracts to reduce wage rates in subsequent bargains. I test further implications of the model against cross-sectional patterns in wage and employment behavior during contracts.