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Monetary policy with weakened unions

Author

Listed:
  • Amélie BARBIER-GAUCHARD
  • Francesco De PALMA
  • Thierry BETTI

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.

Suggested Citation

  • Amélie BARBIER-GAUCHARD & Francesco De PALMA & Thierry BETTI, 2020. "Monetary policy with weakened unions," Working Papers of BETA 2020-26, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2020-26
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    References listed on IDEAS

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    More about this item

    Keywords

    monetary policy; employment; inflation; wage setting; union bargaining power; efficiency bargaining; conservatism.;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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