Corporatism and macroeconomic stabilization policies

This paper analyzes corporatism in a two-player game which integrates macroeconomic stabilization policy and a policy of social transfers. The government decides on the level of nominal social transfers, and the trade union decides on the nominal wage level. A central finding is that if one assumes that the trade union’s utility not only depends on employment, output and inflation, but also on the level of social transfers, there is always scope for Pareto-improvements, relative to the noncooperative Nash equilibrium. In particular, there always exists a bargained combination of lower wages and higher social benefits that is beneficial for both players. Another important result is that an increase in the degree of inflation aversion of the trade union leads to a lower wage level, a lower level of inflation and a higher level of output. The effect on social transfers depends, among other things, on the degree of inflation aversion of the government. Finally, the paper provides a detailed analysis of when the wage level and the level of social transfers are strategic complements or substitutes for each of the players.