Impact of labor contracts: Evidence from Brazil

The conventional Keynesian model suggests that frictions created by nominal wage contracts generate a positive relationship between inflation and outp ut. On the other hand, the New Classical/Real Business Cycle theory claims that firms and workers base their employment behavior, and hence output, on the marginal product of labor ignoring the efficiencies of fixed nominal w age contracts. Using Brazilian data, where nominal wages were indexed by la w, tests show that fixed nominal wage contracts insignificantly affected ou tput. Thus, the data support the view that fixed nominal wages play an insi gnificant role in determining the evolution of output. (JEL E31).