RICERCA ITALIANA     

Research program

New Keynesian dynamics in unionised labour markets and the design of EU institutions

University Co-ordinator

Università degli Studi di MILANO-BICOCCA - ECONOMIA POLITICA - MILANO(MI)

Research Unit Leader

Patrizio TIRELLI

Description

This research project proposes an investigation into the strategic interdependence between budgetary policies and wage-setting behaviour in unionized labour markets. More specifically, it reconsiders the results obtained by the literature on the interaction between unionized labor markets and macroeconomic institutions and policymakers(LLMI) within the framework of dynamic stochastic general equilibrium models with nominal rigidities (NK-DSGE models). Such a "contamination" may benefit both approaches. On the one hand NK-DSGE models feature three key aspects which are usually neglected in the LLMI literature. The first is the interaction between fiscal and monetary policymakers through demand-side channels. The second is the explicit modelling of capital accumulation. The third is the introduction of a truly dynamic dimension which is typical of DSGE models. LLMI models are in fact characterised by the typical Barro and Gordon static framework, where demand side channels are largely ignored, and the capital stock is exogenous to labour market and tax distortions. On the other hand, NK-DSGE models treat labour market distortions as exogenous to the macropolicy regime.
Beyond the contribution to macroeconomic theory, the project has interesting implications for the design of macroeconomic institutions in economies characterized by unionized labour markets, such as the European Monetary Union.
The proposed research will develop along the lines.
1) Investigate the consequences of the fiscal-monetary policy interaction on trade-unions behaviour. To this end we shall merge the Acocella-Di-Bartolomeo-Tirelli and the Dixit-Lambertini models (see the scientific base). By doing so, labor market distortions will become endogenous to the fiscal monetary interaction described in Dixit –Lambertini (2003 a). As a result we expect that the Dixit-Lambertini conclusions about the adverse effects of conflicting preferences between the policy makers (for instance when the central bank inflation target is "conservative") be reversed or, at least, attenuated. In fact, the inefficiently contractionary policy mix described in Dixit-Lambertini will unambiguously raise the employment losses generated by a wage increase, thereby disciplining unions. This result hinges on the strategic substitutability between tax and real wage distortions identified in Acocella-Di-Bartolomeo-Tirelli (2005 a, b), extending it to a more plausible theoretical framework. In the same vein, we shall reconsider the symbiosis of monetary and fiscal policies in a monetary union (Dixit and Lambertini 2003, see scientific base).
2) Analyse the implications of steady-stade accumulation of public debt. The underlying intuition is as follows. Capital accumulation in steady state unambiguously raises real wages. Suppose that 1) debt accumulation has non-ricardian crowding–out effects, 2) firms investment decisions positively depend on the available cash flow (Bernanke Gertler and Gilchrist) and therefore on the real wage rate. In this case strategic substitutability arises between debt-induced fiscal distortions and real-wage distortions. Furthermore, this outcome has an interesting political economy interpretations: trade unions should oppose fiscal regimes which generate public debt accumulation in steady state. Our analysis will be carried out extending the model of Kaas and von Thadden (see scientific base) to account for a) financia constraints, b) trade-unions forward-looking behaviour c) a broader set of tax instruments than the only labour-tax instrument
3) Reconsider the impact of tax/transfer systems (tax rates and unemployment benefits) on wage-setting behaviour. It is well known that unemployment benefits strengthen the hand of trade unions in wage negotiation rounds (Blanchard-Tirole 2004). On the other hand, higher tax distortions have a disciplining influence (Acocella-Di-Bartolomeo-Tirelli, 2005 a , b). Moreover, when a fraction of households are constrained to consume out of current income (the so called rule-of-thumb consumers, Galì et al., 2003; see scientific base), well designed tax rates and unemployment benefits help to stabilize the economy facilitating the role of monetary policy (Muscatelli, Tirelli and Trecroci, 2004). How do trade unions react to fiscal policies in this more complex scenario? The starting point will be an "augmented" Dixit-Lambertini model, which is static but allows to capture the key macroeconomic channels (rule-of-thumb-consumers and calvo pricing) wich allow for demand-side effects of fiscal policies beyond the standard public expenditure effect. The sequence of moves in the game is easily characterised. First, the policymaker defines the unemployment benefit scheme; second, the union and the firm bargain over the wage rate, taking as given the benefit scheme; third, shocks occur; fourth, monetary policy is implemented and simultaneously firms react according to the Calvo pricing rule outlined in Dixit-Lambertini. Observe that the unemployment benefit scheme has important implications both on the supply and the demand side (in this case as a transfer to rule-of-thumb consumers). If wage setters are risk averse, a well-designed unemployment scheme may limit real wage distortions. In an open economy framework a similar result is obtained for the optimal monetary policy when capital markets imperfections limit international risk sharing (Obstfeld and Rogoff) and the exchange rate pass-through is incomplete (Corsetti and Pesenti)
4) For each of the channels of interdepence outlined above, we shall implement an analysis of the potential gains from cooperation between the fiscal policymaker and the trade unions.
5) Use institutional and macroeconomic data on developed OECD
countries to conduct an empirical examination of the main theoretical
findings of 1) and 2). Considering the strategic interaction among trade unions, governments and the central bank and in view of the endogeneity of trade union behaviour with respect to monetary and fiscal policy, a cross-country time-series analysis allows to analyse the impact of fiscal policies such as tax and changes of public expenditure components on union behaviour in terms of wage requests. A cross-country time-series empirical analysis would permit also to test whether or not tax and real wage distortions are strategic substitutes and if this relationship holds under different degrees of cooperation between trade unions and governments, that is under different degree of corporatism. The latter examination can be made using both the cross-country and the time-series dimension, exploiting the frequent reforms of the industrial relations systems that took place in many countries in the last decades. Moreover, empirical analysis permits to investigate whether the impact of the level of corporatism/cooperation between trade unions and government on wages interacts with other dimension of the industrial relations system, such as the degree of centralisation of collective bargaining. The source of institutional data is OECD, which produces various indicators for the main characteristics of the actors involved, i.e. trade unions, governments and the central bank. Other national institutions may provide data regarding the macroeconomic variables of interest.The research team includes some "external" researchers who have a specific expertise on some parts of the project. Carmignani and Muscatelli have worked with Tirelli on theoretical models of the link between monetary policy regime and real wage determination (see reference list). Laura Pagani is a labour economist and will contribute to part 5 of the project, jointly with Colombo and Stanca. Muscatelli and Tirelli have done some joint work on empirical NK-DSGE models with rule-of-thumb consumers.