Louis N. Christofides
University of Cyprus – Department of Economics; University of Guelph; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
Andrew J. Oswald
University of Warwick – Department of Economics; Institute for the Study of Labor (IZA)
NBER Working Paper No. w3188
This paper studies the determinants of real wage rates using data on Canadian labour contracts signed between 1978 and 1984. Its results are consistent with Dunlop’s neglected (1944) hypothesis that real pay movements are shaped by product price changes (contrary to the predictions of implicit contract theory and other models of wage inflexibility). The level of the unemployment rate is found to lower the real wage level with an elasticity between -0.04 and -0.13, whereas a Phillips Curve specification which relates wage changes to the level of the unemployment rate is not convincingly supported by the data. These results may be seen as consistent with the view that collective bargaining is a form of rent-sharing in which external unemployment weakens workers’ bargaining strength.