Working Paper: CEPR ID: DP2236
Authors: Alex Cukierman; Francesco Lippi
Abstract: This paper analyzes the macroeconomic consequences of the establishment of a monetary union in the presence of unionized labour markets. It is shown that the effects of the formation of a monetary union depend on several labour market features, such as the degree of centralization of wage bargaining, labour unions' inflation aversion and the degree of substitutability between the labour of different unions. In particular, the switch from national monetary policies to a unified monetary policy usually affects both inflation and unemployment, even when all structural parameters of the economy and of unions' and policy makers' preferences remain the same.The benchmark case of a monetary union between identical countries suggests that the switch to a monetary union is likely to make labor uur unions more aggressive, increasing unemployment. Qualifications to this result are provided and their robustness is investigated under alternative structural assumptions, like cross-country asymmetries, (pre-union) ERM membership and wage leadership.
Keywords: monetary union; inflation; unemployment; labour unions; strategic monetary policy
JEL Codes: E50; E58; J50; J51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Establishment of a monetary union (MU) (F36) | more aggressive wage behavior from unions (J51) |
| more aggressive wage behavior from unions (J51) | higher unemployment (J64) |
| Establishment of a monetary union (MU) (F36) | higher unemployment (J64) |
| Establishment of a monetary union (MU) (F36) | higher inflation (E31) |
| change in strategic interaction between unions and the central bank (CB) (E58) | alterations in macroeconomic performance (E65) |