Optimal Contract Design in the Wild: Rigidity and Control in Labor Contracts

Elliott Ash (University of Warwick and ETH Zurich)
Bentley MacLeod (Columbia University)
Suresh Naidu (Columbia University)

Abstract: We document determinants of incompleteness, rigidity, and delegation in union contracts using a new corpus of 30,000 collective bargaining agreements from Canada from 1986 through 2015. Using ideas and methods from computational linguistics, we extract measures of rigidity and worker control from the text of the contract clauses. We then analyze how rigidity and authority in contracts varies according to firm-level factors and external factors. We document that contracts impose obligations equally on firms and workers but give entitlements mostly to workers. Worker entitlements have increased as a share of contract clauses over the last forty years. An increase in personal income tax rates is associated with an increase in worker entitlements, consistent with a substitution effect away from taxed compensation (income) and toward untaxed compensation (amenities). Control of province government by the labor-supporting New Democratic Party is associated with higher worker authority, consistent with higher bargaining power for workers due to political support. We further document a role for contracts as reference points as proposed by Hart and Moore (2008): negative wage shocks due to low COLA adjustments mis-predicting inflation are associated with higher strike rates and strike intensity, consistent with conflict due to frustrated worker expectations relative to a reference point. However, this wage-strike effect is attenuated by contracts with higher worker authority, consistent with a better-managed relationship.

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