Labor Market Regimes and the Effects of Monetary Policy

Abstract

In this paper we use a standard multi-union, monopolistic competition model to investigate the qualitative and quantitative responses of inflation and unemployment to monetary policy activism under different institutional arrangements in the labor market, which are defined by the rigidity of nominal wages. We show that the effects of monetary policy on the real economy depend critically on the wage formation regime, and on the ways in which the restrictiveness of policy interacts with product price competition, with union centralization, and with the weight placed on real wage premiums as compared to unemployment in unions’ optimal programs. Our interpretation of the results emphasizes how the posture of monetary policy toward inflation influences the strategic calculations that drive union wage setting behavior in different institutional settings.