Working Paper BETA #2020-26

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Title : Monetary policy with weakened unions

Author(s) : 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.

Key-words : monetary policy, employment, inflation, wage setting, union bargaining power, efficiency bargaining, conservatism

JEL Classification : E02, E24, E52, E58, J51