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Monetary Institutions, Monopolistic Competition, Unionized Labor Markets and Economic Performance* 

Authors


  • * 

    We benefited from discussions with Steinar Holden, Francesco Lippi, Asbjørn Rødseth and David Soskice, and from the reactions of seminar participants at the University of Oslo, Tilburg University, Tel Aviv University, IGIER, Milan, WBZ, Berlin, the LSE Siena workshop and the workshop on wage bargaining within EMU at the Austrian National Bank. Suggestions by two referees are also gratefully acknowledged.

Abstract

Recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy, but not both. This leads to two opposing views about the effects of central bank conservativeness. We evaluate the relative merits of those conflicting views by developing a unified framework. We find that: (i) the effect of conservativeness on employment depends on unions’ relative aversion to unemployment versus inflation, and (ii) for plausible values of this relative aversion (and more than one union), social welfare is maximized under a highly conservative central bank. We also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation.

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