Abstract
This paper focuses on the interaction of monetary policy and wage formation in economies with strong labor unions. Government and unions are viewed as endogenous utility maximizers and the macroeconomic consequences of their strategic interaction are explored with the aid of some elements of simple game theory. Specifically, it is shown (a) how labor unions adjust wages to prices so as to maximize their utility following changes in monetary policy; (b) how the effectiveness of monetary policy is circumscribed without necessarily being nullified by the utility-maximizing reactions of unions; and (c) how the interplay of government and unions can create a persistent tendency towards inflation and unemployment simultaneously.
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Earlier drafts of this paper appeared as “Money, exchange rates, wages, and games,” Seminar Paper No. 383, Institute for International Economic Studies, University of Stockholm, June 1987, and “The Interaction of Monetary Policy and Wages,” Discussion Paper No. 551, Centre for Economic Policy Research, July 1991. We are grateful to an anonymous referee for helpful comments and to the Nordic Economic Research Council for support.
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Gylfason, T., Lindbeck, A. The interaction of monetary policy and wages. Public Choice 79, 33–46 (1994). https://doi.org/10.1007/BF01047917
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DOI: https://doi.org/10.1007/BF01047917