Working Paper: CEPR ID: DP551
Authors: Thorvaldur Gylfason; Assar Lindbeck
Abstract: This paper focuses on the interaction of monetary policy and wage formation in economies with strong labour unions. Government and unions are viewed as endogenous utility maximizers, and the macroeconomic consequences of their interaction are explored with the aid of some elements of game theory. It is shown: (a) how labour unions optimally adjust wages to prices following changes in monetary policy; (b) how the effectiveness of monetary policy is circumscribed without necessarily being completely nullified by the optimal reactions of unions; and (c) how the strategic interplay of government and unions can create a tendency to inflation and unemployment simultaneously.
Keywords: monetary policy; wages; labour unions; nonneutrality
JEL Codes: 023; 311; 831
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy changes (E52) | Wage levels (J31) |
| Unions' preferences for inflation and employment (J51) | Effectiveness of monetary policy (E52) |
| Government actions (H11) | Union wage-setting behavior (J51) |
| Union wage-setting behavior (J51) | Economic outcomes (F69) |
| Monetary policy (E52) | Output and employment (E23) |
| Unions' optimal reactions (J51) | Effectiveness of monetary policy (E52) |