An examination of the duration of wage contract

One way of explaining deviations in employment is through the existence of labor contracts which set the nominal wage rate. This type of contract has been used by Fischer (1977) and others in subsequent papers to show that even when expectations are formed rationally that monetary policy can lessen deviations in employment. This thesis considers an alternative type of wage contract used in Britain and France. Then, empirical tests of the implications of the contract models are considered.;Chapter one derives the optimal contract length when contracts adjust only when conditions merit. This type of contract has a lower cost than contracts which have predetermined adjustment dates. Even when monitoring costs are included, the stochastic-duration contracts have lower costs.;Chapter two considers some reasons for the coexistence of both contract types. Feedback rules are shown to dominate other monetary policies under either type of contract. Policy which depends upon the contract type, cultural differences, or differences in the cost of contract adjustment can explain the coexistence of the two contract types.;Chapter three tests empirically the implications of both models that while contract length and inflation uncertainty vary inversely that contract costs and contract length vary directly. While these implications hold with a fair amount of robustness for the Canadian data, they do not generally hold for the U.S. data.