Collaborative Research: Contract Theory and Labor Market Behavior: An Empirical Analysis

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The purpose of this research is to determine whether a contractual approach to the labor market can help explain the movements of wages and hours worked over the business cycle. Important, preliminary findings using the contract approach have already shown great promise for analyzing these movements. The project will involve extending this preliminary work in several directions in order to further assess the empirical relevance of contracts in explaining labor market outcomes. Firstly, the type of contract model which is most consistent with individual level wage data will be developed and tested. Secondly, research will focus on how to estimate the intertemporal substitutability of leisure when employment relations are governed by long term contracts. Thirdly, individual level data from several different counties will be used to investigate how labor market flexibility can be compared when employment relations are governed by contracts. Finally, a market clearing contract model will be analyzed to determine whether such a model can explain the aggregate behavior of employment levels over the business cycle. This project is important because it will provide useful insights into the nature of the movement of wages subject to contractual relations over the business cycle.