Fiscal-monetary policy interactions in the presence of unionized labor markets

Abstract

This paper develops a framework for studying the interactions between labor unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labor taxes, the replacement ratio, labor market institutions and monetary policymaking institutions on economic peformance in the presence of strategic interactions between labor unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labor taxes or in unemployment benefits to labors costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labor taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that, normally, higher levels of centralization and conservativeness induce government to set higher labor taxes.

Monetary Discipline as a Substitute for Fiscal Reforms and Market Liberalisations

“…As in Cukierman and Dalmazzo (, henceforth CD), there is a continuum of mass one of monopolistically competitive firms, and n equally sized labour unions. Each monopolistic union covers the labour force of a fraction of the firms.…”

“…In what follows we draw on previous work to focus on reform selection. In particular, we exploit the framework in Cukierman and Dalmazzo (), extended to consider the role of seigniorage and the implications of product‐market competition, to discuss the government's incentives to adopt: (i) monetary discipline, (ii) fiscal discipline or (iii) structural reforms for deregulating product markets. On the one side, labour unions have substantial wage‐setting power but the behaviour of the Central Bank can affect wage claims.…”

Fiscal Activism Under Inflation Targeting and Non‐atomistic Wage Setting

“…None of the aforementioned studies considers the simultaneous interaction between the fiscal authority, the central bank and wage setters. An exception is Cukierman and Dalmazzo (2006), which constructs a model where fiscal and monetary authorities have different objectives in a framework with unionized labour markets. However, in the setting of Cukierman and Dalmazzo, fiscal policy consists of only labour taxes levied to finance unemployment benefits, and such a setting fails to incorporate aggregate demand as a channel through which expansionary fiscal policy may affect the real economy.…”

“…I draw somewhat on the work by Cukierman and Dalmazzo (2006), but extend the analysis in mainly three dimensions. First, I expand on the role of fiscal policy by introducing a public good, the provision of which affects labour demand.…”

Unions, Monopolistic Competition and the Optimal Monetary Regime

“…However, such a modification would in no way alter the paper's key result. For an example of this alternative modelling practice, see Cukierman and Dalmazzo (2006).…”