How Certain Are We About the Role of Uncertainty in the Labour Contract Duration Decision? Evidence for Canada and Implications

One of the stylized facts of Canadian labour markets in the 1990s and into the new millennium is a lengthening in labour contract duration. Various authors have analyzed the underlying factors influencing the duration of labour contracts in Canada, but they have typically covered only periods up to the late 1980s or early 1990s. A particular area of interest to the Bank of Canada is the role played by inflation uncertainty. Since the adoption of an inflation target by the Bank of Canada in 1991, Longworth (2002) documents that based on a variety of measures, both the level and variability of inflation have fallen. Moreover, a lengthening in contract duration has been cited as an indicator of increased monetary policy credibility by many authors (e.g., Amano, Coletti, and Macklem 1999; Jenkins and O’Reilly 2001; and Longworth 2002). With about 10 years under the new inflation regime, it is therefore an opportune time to re-examine the impact of inflation uncertainty on the duration of labour contracts. The limited empirical evidence for Canada suggests a negative relationship, i.e., that How Certain Are We About the Role of Uncertainty in the Labour Contract Duration Decision? Evidence for Canada and Implications