Volatility, Stabilization and Union Wage-setting: The Effects of Monetary Policy on the ‘Natural’ Unemployment Rate

Luigi Bonatti

Economic Notes, 2002, vol. 31, issue 1, 109-123

Abstract: type="main" xml:lang="en">

In a unionized economy with nominal-wage contracts, the ‘natural’ (rational-expectations equilibrium) employment level is not invariant with respect to the stabilization rule followed by the monetary authority. This is because alternative monetary policies change the variance of the inflation rate (price level) relatively to the variance of some measure of economic activity (employment level), thereby influencing the trade-off desired by union members between the real wage and the probability of employment. Indeed, a more volatile employment level induces the (risk-neutral) union members to prefer a higher expected real wage.

(J.E.L: E5, J5).

Date: 2002
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