Trend inflation as a workers’ discipline device

The paper shows that a monetary policy regime that allows for a positive inflation rate disciplines monopolistic wages setters if these, when setting contracts, internalize the consequences of their choices for economic outcomes over the life of the contract. We also show that discretionary monetary policy has real effects when wage setters are non atomistic, whereas commitment to a positive inflation rate is effective irrespective of the degree of labor market centralization. Finally, the model may explain the different unemployment dynamics in Europe and in the United States, following the 1980 disinflationary episode. Our approach suggests that disinflation induced an adverse effect on the labor market wedge and that such effect was stronger in Europe, due to the particular importance of large wage setters.     

On labour mobility and the neutrality of money in unionised economies

A recent literature suggests that when wage setters are non-atomistic, strategic interaction between trade unions and the central bank may cause the monetary regime to matter for the labour market outcome, see Cukierman and Lippi (1999), Soskice and Iversen (2000), Vartiainen (2002), Holden (2003), Lippi (2003), Corricelli et al. (2006), Gnocchi (2006) and references therein. I show that when perfect labour mobility is introduced in a game between large wage setters and the central bank in a small open economy, the monetary regime is of no importance for real wages, employment or profits. The result suggests that if labour mobility is sufficiently high, worker migration is likely to mitigate the labour market effects of monetary regimes over time.     

Has the EMU reduced wage growth and unemployment? Testing a model of trade union behavior

Grüner (2010) argues that the introduction of the European Monetary Union (EMU) led to lower wage growth and lower unemployment in participating countries. According to Grüner, monetary centralization increases the amplitude of national business cycles, which leads to higher unemployment risk. In order to counter-balance this effect, trade unions lower their claims for wage mark-ups, resulting in lower wage growth and lower unemployment. This paper uses macroeconomic data on OECD countries and a difference-in-differences approach to empirically test the implications of this model. Although we come up with some weak evidence for increased business cycle amplitudes within the EMU, we neither find a significant general effect of the EMU on wage growth nor on unemployment.     

Wages and Wage-Bargaining Institutions in the EMU – A Survey of the Issues

The paper distinguishes between the impact of the EMU on nominal wage flexibility and on equilibrium real wage and unemployment levels. A perceived need to increase nominal wage flexibility as a substitute for domestic monetary policy and a tendency to less real wage moderation in the EMU are likely to promote informal bargaining coordination and social pacts in the medium run. But such coordination is not likely to be sustainable in the long run, as it conflicts with other forces working in the direction of decentralization and deunionization. This could lead to more government intervention in wage setting during a transitional period. Although monetary unification will strengthen the incentives for higher-level transnational coordination of wage bargaining, such a development is improbable in view of the coordination costs involved. If transnational coordination develops, it is most likely to occur within multinational firms.     

Equilibrium unemployment with outsourcing and wage solidarity under labour market imperfections

We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high- and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will dampen this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.     

Implications of Economic Interdependence for Endogenous Wage Indexation Decisions

This paper shows how economic interdependence affects the indexation decisions of atomistic wage setters in an environment in which monetary authorities do not observe stochastic disturbances before making their policy choices. If stochastic disturbances are common across countries, interdependence has no effect on equilibrium indexation choices in identical countries. However, if disturbances are country specific, numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relative to a small open economy. We also show that indexation choices may be either strategic complements or strategic substitutes, but that strategic complementarity becomes more likely as the degree of interdependence rises.     

Wage rigidities and unemployment fluctuations in a small open economy

This study analyzes the implications of the monetary policy for the unemployment rate in a small open economy. We introduce nominal wage rigidities and unemployment into the small open economy version of the dynamic stochastic general equilibrium model. We derive three main findings. First, under nominal wage rigidities, the cyclical properties of the calibrated model, in response to a productivity shock, are consistent with the empirical evidence on a decrease in employment and an increase in real wages. Second, for all the variables considered, the Taylor rule tracks the optimal policy better than the simple rule with unemployment as an argument. Third, regardless of the output or unemployment gap being targeted, it is not optimal that central banks respond to nominal exchange rate variations.     

Reputation building in a monetary policy game

This paper examines the notion of reputation building on the part of the central bank as a means of eliminating socially suboptimal inflation rates that arise in monetary policy games. The framework developed here explicitly models the behavior of wage setters, and it is shown that in the Nash equilibrium these private agents do not attain their desired outcome. Hence, wage setters have an incentive for engaging in a reputation-building game with the central bank. In this game, wage setters are allowed to select “optimally” a reputation based wage strategy, thereby making the strategy choice endogenous. This framework thus lays the groundwork for models in which the private sector behaves as a strategic player. It is shown that there exists a wage contract resembling an indexing arrangement which eliminates the suboptimal inflation rate. Finally, a discussion on the ways of restricting the number of permissible solutions to this game is presented.     

NOMINAL WAGE INDEXATION,QUASI‐EQUILIBRIA AND REAL WAGE DYNAMICS

In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations , I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic ‘quasi‐equilibrium’. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long‐run quasi‐equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a ‘wage‐aspiration effect’ might lead to the persistence of involuntary unemployment.     

A monetary model of China–US trade relations

This paper develops a general equilibrium monetary model to study China–US trade relations. The model captures two main features of China–US trade: China's fixed exchange rate regime and the use of the US dollar as the international medium of exchange. The main conclusions of this paper are threefold. First, an improvement in the productivity of China's tradable sector would benefit both China and the US. Second, a RMB appreciation would reduce consumption in the US and increase consumption in China, and would likely reduce China's trade surplus. It would also lead to a contraction in China's tradable sector and an expansion in US's tradable sector. Third, a monetary expansion in the US would hurt China because it would lead to a transfer of wealth from China to the US, a fall in China's relative wage rate and terms of trade, and an artificial expansion in China's tradable sector. A US monetary expansion would also increase China's trade surplus.     

Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe

In this paper we derive a general equilibrium model based on optimising behaviour, which also implies a data consistent framework for monetary policy analysis. Specifically, our model accounts for nominal inertia in both price and wage setting as well for habits in consumption. Using US and European data from 1970 to 1998 our parameter estimates reveal that (i) price contracts last for 8 months and 13 months in the US and Euro-area, respectively; (ii) wage contracts have a length of 7 months and 1.75 years in the US and Europe, respectively; (iii) the extent of backward-looking behaviour in price setting is statistically significant in both economies with 41% of price contracts in the US and 28% in the Euro-area set according to a simple rule-of-thumb; (iv) backward-looking wage setting is only present in Europe with 17% of contracts set in a backward-looking manner; and (v) similar habits effects are present in both European and US consumption. Finally, we simulate the effects of monetary policy by considering the impact of a 1 point increase in nominal interest rates for one quarter. Our parameter estimates imply that there is a relatively muted inflationary response to interest rate increases in Europe (price inflation falls by -0.08% in Europe and 0.11% in the US) and there is a correspondingly large output response (-0.2% in the US and -0.6% in Europe).     

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

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.     

Wage setting actors and sticky wages: Implications for the business cycle and optimal monetary policy

Two sticky-wage models are introduced in this paper to examine the implications of having either households or firms as wage setting actors. The rate of wage inflation depends positively on the output gap if households set wages whereas such a relationship is of negative sign when firms set wages. Moreover, impulse–response functions and the statistical comparison with US data show different business cycle properties depending upon wage setting actors. Finally, optimal monetary policy is derived for each case, and compared with a Taylor-type monetary policy rule.     

Growth and unemployment in a shirking efficiency wage model

Abstract.  The relationship between growth and unemployment in a general equilibrium shirking efficiency wage model is explored. In contrast to past work on this subject, detected shirkers are not dismissed but instead incur a monetary punishment. As a result of this modification, the model can account for a stable rate of unemployment when there is positive population growth and/or technological growth in the economy. Moreover, I show that institutions and policies that limit the ability of firms to punish detected shirkers or restrict their use of discretionary bonuses can increase unemployment and reduce the economy's long run growth rate. JEL Classification: E0, J41     

Robust central banking under wage bargaining: Is monetary policy transparency beneficial?

We study the role of transparency in an environment of robust monetary policy under wage bargaining. The standard view from the game-theoretical literature is that, with unionised labour markets, monetary policy transparency is unambiguously “bad” (it induces increases in wage and price inflation, unemployment and may lead to higher inflation uncertainty). The empirical literature is instead ambiguous about the macroeconomic effects of transparency. By recasting the earlier theory into a robust monetary policy environment, and focusing transparency on the uncertainty about the preference for price stability, we show that the macroeconomic effects of transparency are more favourable than normally found. The impact on nominal wages, inflation and real variables (real wages and unemployment) is not parameter-free but depends on the public's informedness about this coefficient. The impact on real variables is found to disappear in case unions do not internalise the effect of wage decisions on the economy (i.e. in the case of atomistic unions). Finally, we find that the effect of transparency on inflation uncertainty is more complex than in the standard approach. We show that transparency may have the beneficial effect of reducing inflation variability not only when monetary uncertainty is low (as previously reported), but also when monetary uncertainty exceeds an upper threshold.     

Working capital requirement and the unemployment volatility puzzle

Shimer (2005) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data.     

Wages,selectivity, and vacancies: Evaluating the short-term and long-term impact of the minimum wage on unemployment

Using a circular matching model (Marimon R, Zilibotti F. Unemployment vs. mismatch of talents: Reconsidering unemployment benefits. Economic Journal 1999;109; 266–291), where the wage setting is similar to Weiss (Weiss A. Job queues and layoffs in labor markets with flexible wages. Journal of Political Economy 1980; 88; 526–538), we reexamine Card and Krueger's (Card, D., Krueger, A. Myth and Measurement, the New Economics of the Minimum Wage. Princeton University Press; 1995) intuition on the impact of the minimum wage on unemployment. In the short term, a rise in the minimum wage increases the employment level by making firms less selective. In the long term, numerical simulations show that, despite the reduction of job creation, introducing a minimum wage may lower unemployment as soon as workers and jobs are sufficiently differentiated. However, beyond some limit, the wage increase raises unemployment whatever the degree of differentiation is.     

Excess supply equilibria

This paper addresses a fundamental problem in economic theory: How can there be equilibria of the economic system where some commodity is in excess supply, yet that commodity's relative price shows no tendency to fall? Of course, the principal example of such a phenomenon is an economy experiencing a prolonged period of involuntary unemployment of the labor force during which there is no significant change in the real wage.In the following pages, I shall describe a two-commodity, general equilibrium model that has a continuum of unemployment equilibria, one for any given unemployment rate. The important feature of this model is that workers establish their wage rates in an attempt to maximize expected utility. The information upon which these wage setting decisions are based is provided by actual labor market transactions.Despite the voluntary nature of the wage setting decision, I shall argue that each equilibrium of this economy exhibits involuntary unemployment in the Keynesian sense. For there will always be another equilibrium with a lower real wage, a higher level of employment, and at which (at least when workers are risk neutral) each worker achieves a higher level of expected utility.     

Wage restraint and monetary union

Existing work on wage bargaining predicts more aggressive wage setting under monetary union. This is exemplified by Cukierman and Lippi (2001) who postulate that wages are set having area-wide prices in mind. The insight of aggressive wage behaviour has not been confirmed by the EMU experience, which has been characterised by wage moderation. The present paper investigates the possibility of wage restraint using a monetary union model which, realistically, assumes that trade unions set wages with national prices in mind. Drawing on plausible ranges for all parameter values (and macroeconomic shocks), our simulations show that a monetary union elicits real wages that are broadly comparable to those obtained under monetary autonomy. The confidence bounds around these results are rather wide, in particular including scenarios of wage restraint.     

Incentives to Diffuse Advanced Abatement Technology Under the Formation of International Environmental Agreements

We analyse the incentives for polluting firms to diffuse and adopt advanced abatement technology in a framework in which governments negotiate an international environmental agreement. These incentives crucially depend on whether the underlying environmental policy instrument is an emission tax or an emission quota. The results for the international setting fundamentally differ from those for the national setting that have been elaborated upon in the earlier literature. In particular, equilibrium diffusion and adoption of advanced abatement technology are not necessarily optimal under the tax regime and may be even lower than those under the quota regime.