The Effect of Collective Bargaining and Central Bank Independence on Inflation and Unemployment: Evidence From the OECD

Y.K. Chou

No 770, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: In this paper, panel data from 15 OECD countries (1971-1990) are used to test the hypothesis that differences in monetary and labour market institutions explain a significant portion of the surprisingly diverse inflation and unemployment experiences among similarly developed economies. As an alternative to the measures of centralization of wage bargaining and corporatism used in previous studies, a Hefindahl index of union concentration is used as a proxy for the degree of coordination failure extant in wage setting. Additional explanatory variables used include union density, union coverage and the level of wage bargaining. We observe that inflation has a hump-shaped relationship with central bank independence and union density, as well as a negative relationship with union concentration, while unemployment has a U-shaped relationship with union density, and a hump-shaped relationship with union concentration and central bank independence. These findings are largely robust to the use of alternative estimators and assumptions on the structure of the error term. Further results are obtained from stratifying the sample by central bank independence and union concentration. These are then compared with the contrasting predictions of two recent theoretical models. Finally, we show that high union concentration is associated with smaller deviations of actual inflation rates from predicted rates in the aftermath of the 1973-74 OPEC price shock.

Keywords: BANKS; INFLATION; WAGES; LABOUR MARKET (search for similar items in EconPapers)
JEL-codes: E24 E31 E58 J51 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2000
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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