Working Paper: CEPR ID: DP5282
Authors: Alex Cukierman; Alberto Dalmazzo
Abstract: This paper develops a framework for studying the interactions between labour unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labour taxes, the replacement ratio, labour market institutions and monetary policy-making institutions on economic performance in the presence of strategic interactions between labour unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labour taxes or in unemployment benefits to labours costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labour taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that higher levels of centralization and conservativeness induce government to set higher labour taxes if the replacement ratio and the tax wedge are sufficiently small.
Keywords: Central Bank Conservativeness; Collective Wage Bargaining; Competitiveness; Inflation; Labour Taxes; Redistribution; Unemployment; Unemployment Benefits
JEL Codes: E5; E6; H2; J3; J5; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher centralization of wage bargaining (J59) | lower unemployment (J68) |
| higher centralization of wage bargaining (J59) | lower inflation (E31) |
| greater central bank conservativeness (E58) | lower unemployment (J68) |
| greater central bank conservativeness (E58) | lower inflation (E31) |
| higher degree of centralization of wage bargaining (J59) | larger forward shifting of labor taxes to labor costs (J39) |
| higher degree of centralization of wage bargaining (J59) | larger forward shifting of unemployment benefits to labor costs (J32) |
| greater central bank conservativeness (E58) | larger forward shifting of labor taxes to labor costs (J39) |
| greater central bank conservativeness (E58) | larger forward shifting of unemployment benefits to labor costs (J32) |
| higher labor taxes (J89) | higher labor costs (J39) |
| higher unemployment benefits (J65) | higher labor costs (J39) |
| higher centralization and conservativeness (H77) | higher labor taxes (J89) |