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Monetary policy with weakened unions

Amélie Barbier-Gauchard, Francesco De PALMA and Thierry Betti

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: We assess the impact of union bargaining power on inflation and employment in the case of efficiency bargaining following Mac Donald & Solow (1981). We consider a Stackelberg two-stage game between the Central Bank and social partners (firms and union). Firms and unions negotiate employment and nominal wage, the Central Bank sets the inflation rate. We show that a decrease in union bargaining power tends to reduce nominal wage and employment. In such a context, where the Central Bank is concerned with inflation and employment, the optimal monetary policy consists in a stronger stabilization of employment at the expense of inflation stabilization. We then employ a panel data model for 36 OECD countries to empirically assess the link between the bargaining power of unions and inflation. Our estimates confirm this theoretical result by showing that a low degree of union bargaining power is associated with higher inflation.

Keywords: monetary policy; employment; inflation; wage setting; union bargaining power; efficiency bargaining; conservatism. (search for similar items in EconPapers)
JEL-codes: E02 E24 E52 E58 J51 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2020-26

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