The Interaction of Monetary Policy and Wage Bargaining in by Sebastian Dullien (auth.)
By Sebastian Dullien (auth.)
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Additional info for The Interaction of Monetary Policy and Wage Bargaining in the European Monetary Union: Lessons from the Endogenous Money Approach
This has certainly not been the typical situation even in the Scandinavian countries, and is, of course, even less plausible in a situation with independent central banks, focusing on price stability as their prime objective. This does not mean that unions do not care about inﬂation, but it seems to be more plausible that they have lexicographic preferences for low inﬂation – that is, preferring low inﬂation to high inﬂation, but only after their optimum solutions for unemployment and real wages have been found.
112). Not only was the scala mobile abandoned, but clear rules for wage bargaining were also established. In addition, a regular, bi-annual meeting between unions, employers and the government was established. This new setup made it possible for Italy to devalue sharply in 1992, when it dropped out of the EMS33 without reigniting a wage–price spiral. In the years to come, wage demands were low enough to keep Italy’s unit labour costs from rising again. 12 Italy: development of unit labour costs (ECU) relative to the EU-11, 1980–2002 Source: European Commission (2002).
In the new literature on the interaction of wage bargaining and monetary policy which builds on Barro–Gordon, the basic setup remains intact. In a ﬁrst stage, unions with some monopoly power (depending on the substitutability between different types of labour and on the numbers of unions in the economy) choose their nominal wage demand. In a second stage, the central bank sets the rate of inﬂation at a level which maximises the bank’s utility. Together with the nominal wage, this rate of inﬂation determines the real wage, which in turn determines output and employment in the economy.