Bargaining Structures and Macroeconomic Performance in a Small Open European Economy with Imperfectly Competitive World Markets

Abstract

This paper analyzes the macroeconomic effects of a national union, which coordinates the wage negotiations in different industries, in a small open economy, trading in imperfectly competitive world markets. Industry wage levels are determined as cooperative Nash bargaining solutions on the labor demand curve. If wage contracts affect industry output prices, a national union leads to wage moderation, higher employment, and lower inflation. By generating inflation and by reducing aggregate and intermediate demand, a wage increase in an industry causes a real income loss and unemployment for members outside the industry. A national union takes this externality into account and settles fo a lower nominal wage than an industry-specific union would. Yet, if aggregate demand policies systematically absorb part of the unemployment consequences of excessive wage settlements, this conclusion could be reversed.