A DYNAMIC CONTRACTING MODEL FOR WAGES AND EMPLOYMENT IN 3 EUROPEAN ECONOMIES

We present a structural dynamic non-linear model for an efficient cont racting between a firm facing adjustment costs on labour and a union h aving preferences which are subject to habit formation. The model's fi rst-order necessary conditions are estimated for the French, the Dutch and the Belgian labour market. The estimation results turned out to b e remarkably similar for the three countries. Two alternative hypothes es are also investigated: (i) a myopic behaviour of the union and (ii) a competitive labour market. The performance of the efficient contrac t model with a forward-looking union is found to be superior to that o f the neo-classical model in explaining the dynamics of employment and wages in the three countries.