Figure 7: Home employment, CBC and n∏ for σ small.
7.3 Interactions between central bank conservatism and centralization
of wage setting
Here we combine the effect of CWS and CBC on employment and inflation relying on the
results obtained in the previous sections. As for employment, the upshots for the Home
country in a MU are shown in Figure 7 and 842.
When σ is small, according to Proposition 5, employment is an increasing function of
CBC as in Figure 7. An inflation averse CB is, actually, willing to contract her money
supply so as to create more unemployment in the economy and reduce inflation. Labor
unions are aware of the unemployment threat arising from a conservative CB and hold
down their wage demands.
Moreover, for a given level of CBC, employment is always decreasing in the num-
ber of unions which is inversely related to their degree of internalization. With a single
all-encompassing union, employment is maximized independently of the monetary conser-
vatism. In such a context, it is not necessary to carry out a monetary contraction threat,
for coordinated wage setters fully internalizes the aggregate labor demand. Note that in
the case of monopolistic competition, i.e. when n∏ goes to infinity, unions do not inter-
nalize at all the macroeconomic impact of their wage claims on inflation and the strategic
interactions with the CB is ruled out43.
Conversely, in Figure 8 labor market distortions are less relevant and a higher degree
of CBC diminishes labor demand elasticity. Since unions are less concerned about the
aggregate unemployment consequences of their wage hikes, they are tempted to set higher
nominal wages which, in turn, increase their own relative real wages. In this case a more
conservative CB is particularly costly in presence of very few unions. In fact, the less is
the number of unions, the more they internalize the real wage gain. For a given level of
CBC, we see a sharp monotonicity between employment and decentralization of the wage
42The graphics under a NMP regime reveal indeed similar behavioral patterns.
43The labor demand elasticity is in fact equal to σ.
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