the monopolistic distortion in the factor market as summarized in the following proposi-
tion.
Proposition 5 (i) For a number of unions n∣∣ ∈ (1, ∞), an increase in CBC raises
employment in a MU and under a NMP regime only if σ < ɪɪ and σ <
k+βp θp
kθn+βpθp (l-α) ’
respectively, (ii) If either n∣∣ = 1 or n∣∣ → ∞ the impact of CBC on employment is nil.
Proof. In the Appendix. ■
As β rises, the elasticity of money supply with respect to local wages switches from
positive to negative values. Thus, an increase in CBC reduces the inflationary repercus-
sions of wage settlement and enlarges the unemployment consequences (as apparent in
equations (31)-(34)). Since the CBC affects the first term (adverse output effect) of the
elasticity of labor demand (41) positively and the second one (adverse competition effect)
negatively, the effect of CBC on the adverse output effect prevails only if the condition
in Proposition 5 holds. In other words, if labor power is sizeable, i.e. σ is sufficiently
small, the г-th union understands that inflation (caused by her nominal wage rise) reduces
employment by triggering a restrictive monetary policy32. On the contrary, if σ is large,
since the inflationary consequences of a wage claim are kept down by a more conservative
CB, unions anticipate a less reduction in the real wages of their competitors yielding wage
aggressiveness.
The impact of CWS on employment will be tackled in the next section. However the
second part of Proposition 5 states that monetary policy is neutral in the case of a single
all-encompassing union (n∏ = 1) and when unions are atomistic (n∏ → ∞). It is worth
noticing that when n∏ → ∞ unions do not perceive wage demands to have any impact
on inflation (sr = 0), and when n∏ = 1 wage differentials are ruled out. In both cases
monetary neutrality arises since unions perceive they can not affect the real wages of the
other unions33. The assumption of non-atomistic and uncoordinated wage setting is hence
crucial when wages are negotiated in nominal terms (Lippi, 2003).
What about the Foreign monetary policy under a NMP regime? In Cuciniello (2007) it
is shown that the CB abroad always counteracts domestic wage demands by a restrictive
monetary policy which triggers the depreciation of the domestic exchange rate. This
boosts inflation further dampening wage claims, since a nominal wage increase ends in
a real wage improvement to a lesser extent. Thus, the higher is the Foreign CBC, the
stronger is domestic wage restraint.
Nevertheless, if the domestic CB is ultra-populist or wage setters are atomistic, the
Foreign CB impact on domestic wages fades away. This is because the strategic interaction
between CB and unions is broken and the (negative) response of the CB abroad to a
32Similarly a wage increase is perceived by the г-th union to rise aggregate real wage (calculated by
taking account of the producer price index) which dampens its wage demands.
33The source of non-neutrality in policy games is analysed in Acocella and Di Bartolomeo (2004).
18