Welfare, large σ
Figure 11: Home welfare, CBC and n∏ for large σ.
Proposition 8 (i) A nationally centralized wage bargaining system maximizes individual
welfare if labor market distortion are sizeable, (ii) In presence of keen competition in the
labor market, an ultra-populist CB or atomistic wage setters are optimal for the society,
(iii) a MU is a welfare maximizing regime when labor market distortions are not sizeable,
(iv) a MU is a welfare maximizing regime when labor market distortions are sizeable if
n∣∣ = 1 or β is sufficiently large,
Proof. In the Appendix.
■
As long as the employment level is below the optimal one, a rise in employment is wel-
fare augmenting. Hence, if labor market distortions are sizeable, we know that the smaller
is the number of the unions, the better is employment performance, and, consequently
welfare (see Proposition 7). Conversely, when σ is large, the monopolistic competitive
outcome is optimal and both an ultra-populist CB and atomistic wage setters can repli-
cate it.
As to the welfare effect of a monetary unification. Note that employment level and
hence welfare are increasing functions of labor substitutability, σ. As a matter of fact, the
higher is the labor substitution, the higher is the labor demand elasticity. Thus we know
that labor markets with sizeable distortions will perform worse, in terms of employment
and welfare, than labor markets where such distortions are lower or nil.
The comparison of welfare between the two regimes when σ is large is shown in Fig-
ure 11. The surface with a thicker mesh stands for the MU regime, while the surface
with a thinner mesh points out the NMP regime both with an ultra-populist and ultra-
conservative foreign CB. It is apparent that the shift to a MU is unambiguously welfare
increasing if the CB cares about inflation. In this respect, the higher adverse output effect
in the MU vis-à-vis the NMP one renders ηu more elastic than gN for any value of β = 0.
By contrast, in the case of ultra-populist CB, a move to a MU leaves welfare unchanged44.
44Remember both labor demand elasticity are equal to σ with an ultra-populist CB.
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