Monetary Policy with Weakened Unions

Amélie Barbier-Gauchard, Thierry Betti and Francesco De Palma

Revue d'économie politique, 2023, vol. 133, issue 4, 525-540

Abstract: We assess the impact of union bargaining power on inflation and employment under efficiency bargaining according to Mac Donald & Solow [1981]. We consider a Stackelberg game between the Central Bank and social partners (firms and unions). Firms and unions negotiate employment and nominal wage, while the Central Bank, which plays as leader, sets the inflation rate. We show that a decrease in union bargaining power tends to reduce nominal wage and employment. In such a context of a leader Central Bank, the optimal monetary policy consists in a higher optimal inflation rate to prevent a rise in unemployment. Moreover, we demonstrate that increasing the optimal inflation rate has more important effects when the Central Bank is weakly conservative. These results argue for reducing Central Bank conservatism to compensate for the macroeconomic impact of declining union bargaining power.

Keywords: monetary policy; employment; inflation; wage setting; union bargaining power; efficiency bargaining; conservatism (search for similar items in EconPapers)
Date: 2023
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