Gary C. Fethke

Wage contingencies, the pattern of negotiation and aggregate implications of alternative contract structures

Abstract A model of long-term contracts is developed in which the choice of the negotiation pattern is endogenized. When disturbances to the economy derive primarily from relative shocks, staggered negotiation is optimal because adjustments made by negotiating agents transmit desirable employment effects into sectors that are looked into previously negotiated contracts. The price level acts as the transmission mechanism. Indexation of wages to the price level enhances the benefits of staggered negotiation because the sector-specific information revealed by the price level acts as a substitute for explicit inclusion in the contract of sector-specific information. The degree of persistence and the level of variation in aggregate output and employment, measures which are commonly used in comparing the merits of synchronized versus staggered regimes, are shown to be inappropriate criteria upon which to judge the optimality of the negotiation pattern.

Will Wage Setters Ever Stagger Decisions

Models featuring the implications of long-term contracts typically impose the pattern of negotiation and then develop the implications of this particular structure with no analysis of whether the structure is optimal or stable. Recent work, however, focuses on the choice of the timing of wage negotiations across sectors.1 In Fethke and Policano [1984] we develop a two-sector model in which each sector is subject to both aggregate and relative disturbances. The main result is that whenever the variability of relative disturbances exceeds the weighted variability of aggregate disturbances, a uniformly staggered pattern of negotiation represents a symmetric noncooperative Nash solution. The twosector case has special properties. First, the benefit associated with staggered negotiation apparently depends on the existence of large negotiating sectors in the economy. Second, symmetry of relative disturbances in the two-sector case leads to the unusual equivalence of the noncooperative and the joint-optimization solutions to the problem of determining the optimal negotiation pattern. One natural question concerns whether the incentive to stagger negotiation dates will diminish as the number of sectors increases. In this paper we develop the three-sector case in detail and then generalize the analysis to any number of sectors. The results indicate that the more significant are relative disturbances, the larger is the number of sectors that will be supported by a stable Nash equilibrium with uniformly staggered negotiation dates. In an economy characterized by atomistic sectors, the incentive to stagger negotiation dates disappears. We also compare the joint-optimization solution with the Nash solution and find that when there are more than two sectors, the requirement for uniform staggering to be optimal is more difficult to satisfy under joint optimization than under the Nash strategy. This di-

Optimal monetary policy, endogenous supply and rational expectations

Abstract In this paper we demonstrate that the choice of monetary policy regime will affect the variability of output when private agents, in forming their supply decisions, take into account the authoritys selection of a policy rule. A striking feature of the analysis is that the choice between policy rules in Sargent-Wallace (1975) framework, but with endogenous aggregate supply, depends only on the variability of aggregate demand under each rule and not on the variability of aggregate supply. It follows that the choice of monetary policy rules reduces to the problem analyzed by Poole (1970) in the stochastic Keynesian structure.

Monetary policy and the timing of wage negotiations

Abstract In a model of long-term labor contracts, the simultaneous determination of the pattern of contract negotiation and the pattern of monetary-policy intervention yields a Nash equilibrium in which agents allow a discretionary role for policy. The resulting pattern of negotiation depends on the stochastic nature of the system. When all disturbances are aggregate in nature, a synchronized pattern of negotiation is optimal regardless of the frequency of monetary-policy intervention. When both aggregate and relative disturbances affect the system, a pattern of bunched negotiations can result with the authority intervening at dates away from the negotiation dates.

The optimal choice of inputs under time-of-use pricing and fixed-proportions technology: An application to industrial firms∗☆

Abstract In this paper we describe the optimal choice of capital, labor and electricity during a representative day of a firm operating under time-of-use (TOU) pricing of electricity and labor. The objective of the firm is to minimize production costs over the day subject to a given output level and several scheduling constraints on the availability of capital and labor. While the underlying theoretical production process of the firm may be ‘flexible’, possibly with substantial substitution among the inputs, most firms find it difficult if not impossible to specify the production process analytically. Thus, we assume that the technology is represented by a set of fixed-proportions activities. This representation is easy to apply in actual situations since the optimal choice of inputs can be formulated as a linear programming (LP) problem. Our analysis shows that the use of a small number of fixed-proportions production activities can result in a good approximation of the optimum. The LP formulation is applied to data sets for two manufacturing firms, and the optimal quantities of output and inputs are close to those actually observed.

Monopoly with endogenous durability

Abstract A multi-period formulation for a durable-good monopoly is developed where production and durability are decision variables. When commitment to production is possible, neither the level nor the depreciation rate of initial stock has an effect on the selected efficient degree of durability. With time-consistent production policy, the optimal degree of durability is less than the efficient rate and typically increasing in the initial stock and initial degree of durability. When a monopolist can switch at any time from an inefficient non-durable to an efficient durable, there exists a cutoff durability above which only the non-durable will be produced; otherwise the efficient durable will be produced.

Long-Term Contracts and the Effectiveness of Demand and Supply Policies

IN RECENT YEARS, the economy has been characterized by simultaneous labor-market slack, accelerating inflation, and a progression of real shocks. In response to these events, nontraditional aggregate control measures have been introduced that seek to affect the supply side of the economy. These policies include controls on wages and prices, general and targeted employment credits and wage subsidies, and tax-based incomes policies. This paper compares the effectiveness of monetary policy and one type of supply-management policy in controlling fluctuations in output and the price level. The supply-side program, which is a variant of the employment tax credit, acts directly on the firms cost of labor and, thereby, on aggregate supply. Monetary policy, on the other hand, directly affects aggregate demand and only indirectly affects the firms cost of labor through its impact on the price level. Since these programs have different transmission mechanisms, a principal question of the analysis concerns whether they exhibit differences in their ability to respond to demand versus supply shocks. An additional question addressed by the analysis concerns the interaction between the length of wage contracts and the policy parameters. The framework consists of log-linear representations of aggregate demand and supply functions that are subject to random disturbances. Fluctuations in output occur as a consequence of both the random disturbances and the underlying wage rigidity caused by long-term contracts. The presence of long-term contracts is

Public no more universities: subsidy to self‐reliance

Purpose – Tightened government budgets are forcing public universities to confront a new economic reality as the traditional low tuition‐high subsidy model of public higher education becomes increasingly unsustainable. The shift toward reliance on tuition relative to taxpayer support reflects adjustments in consumer preferences, increased mobility, enhanced competition from non‐traditional providers, and reallocated government budgets. The outcome is clear: taxpayer support for higher education is decreasing, and is decreasing sharply and permanently when measured on a per student basis. The purpose of this paper is to develop a framework for university leaders that can provide the foundation for the transformation that needs to take place as universities face a permanent decline in public support. The primary goal is to point out differences between private business enterprises and public universities and then to suggest that many of the characteristics that define private sector excellence are applicabl...

Labor contracts, informational discrepancies and the role of monetary policy

Abstract This paper examines output stabilization and inflationary consequences of short-run monetary policy. The macroeconomic framework incorporates informational discrepancies between the monetary authority and economic agents who form long-term labor contracts. Economic agents are assumed to form rational expectations of the rate of inflation. One result of the analysis is that optimal monetary policy rules for stabilizing fluctuations in output and inflation are independent of the structure of the wage contracts and the degree of informational discrepancy. A second proposition shows that the monetary authority can actually make use of specific knowledge concerning the contract structure to reduce fluctuations in the rate of change in output. In particular, the monetary authority can reduce fluctuations in output below those occurring in a frictionless system by increasing fluctuations in the rate of inflation.