Figure 1: Employment and CBC when adverse competition effect prevails in both regimes.
For values of β > β the common CB is conservative, while for values of β < β is populist.
relevant in the union-wide economy36. This could be, for instance, the situation of UK vis-
à-vis the EMU where unions do not play a key role in the domestic labor market and the
national CB is liberal. An ultra-populist CB maximizes employment under a NMP regime.
However, if the CB is inflation averse, the move to the EMU unambiguously improves
employment. In other words, an ultra-populist CB under a NMP regime produces only
a second best result for UK since an ultra-conservative ECB might increase employment
further.
Finally, labor market distortions can be sizeable under both regimes (Figure 3) so
that CBC always boosts employment. Note that an increase in the Foreign CB boosts
employment in the domestic country since it raises the labor demand elasticity. However,
there exists some "small" level of CBC associated with a higher employment level under
a NMP regime; indeed, with an ultra-conservative CB, employment is unambiguously
larger in a MU. The possibility of higher labor demand elasticity under a NMP is due to
the Foreign CB restrictive policy that in presence of a populist Home CB reinforces the
discipline effect on wage settlement37.
7.2 Role of centralization of wage setting
What is the effect of the number of unions on employment and inflation? Here we tackle
these questions holding constant the degree of CBC so as to focus only on the degree of
CWS.
From equations (36)-(40), union numerosity affects employment and inflation via the
elasticity of labor demand, ηr. In particular, an increase in the labor market elastic-
ity, i.e. in the competitiveness of labor market structure, diminishes both inflation and
unemployment.
36It may be due to some sort of friction in labor mobility across countries, e.g. language differences,
bureaucracy and legal barriers.
37The possibility that such a result arises is analytically derived in the Appendix.
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