Monetary policy with weakened unions
Francesco De PALMA and
Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg
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)
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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