Government Fiscal Efforts vs. Labour Union Strikes: It Takes Two to Tango

In this paper, we propose a novel policy-game model to analyse the simultaneous interaction between the government and the labour union in a unionised economy. Our model explains how the economic and political interaction between labour unions, concerning wages and strikes, and the government, dealing with unemployment and fiscal policy, gives rise to a long run Cournot-Nash equilibrium. We estimate the policy-game model by a cointegrated Vector Autoregressive system using Italian quarterly data (1960-2009) on government budget surplus (fiscal efforts) and on hours not worked (strikes) and the speed of their long run adjustment. At equilibrium, a rise in unemployment has a negative effect on the level of effort and strike, while a rise in wages has a positive and negative effect on the level of effort and strike, respectively. A phase diagram interpretation of the estimated model is provided and some policy implications are discussed.