Employment in MU, large σ
Figure 8: Home employment, CBC and n∏ for σ large.
bargaining.
Only an ultra-populist CB may nullify the chance of achieving higher real wages;
indeed, when β = 0 the level of employment is equal to the first best regardless of the
number of unions, so that the monotonic relationship between employment and the number
of unions disappears. Furthermore, the decrease in employment stemming from a greater
monetary conservatism is dampened by the number of unions (the grid becomes flat for
large n∣∣). This conforms with the results in the earlier sections, where CBC does not
affect labor elasticity as n∏ → ∞.
Next we account for the joint effect of the number of unions and CBC on the rate of
inflation. The simulation is contained in Figure 9 and 10.
In both case inflation is a decreasing function of the degree of CBC as we expected.
The main difference is the role played by the CWS with different degrees of σ. When
labor market distortion are high, a lower number of unions may reduce inflation while it
does not have any impact if substitutability among labor types is substantial (σ is high).
This means that the effect of CBC on inflation seems to be largest (smallest) at very high
level of CWS if σ is low (high).
The reason why inflation is not affected by a large number of trade unions is related to
the internalization effect. Atomistic wage setters (n∏ → ∞) do not perceive to have any
impact on inflation (see equation (32)). A non-atomistic union, instead, realizes that an
increase in wage affects positively inflation triggering the response of the CB. What is key
to large unions, however, is that monetary conservatism may influence their monopolistic
power. In Figure 9 they have high monopoly power and CBC reduces it by boosting the
elasticity of labor demand. By contrast, in Figure 10 monopoly power is low and CBC
increases it by diminishing the elasticity of labor demand.
Finally, drawing on the employment analysis, we can consider the joint effect of the
number of unions and CBC on individual welfare. The welfare analysis vis-à-vis labor
market distortion is shown in Figure 11 and 12. The following proposition summarizes
the main results in terms of individual welfare.
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