Fiscal-Monetary Policy Interactions in the Presence of Unionized Labor Markets

37 Pages Posted: 18 Nov 2005

See all articles by Alex Cukierman

Alex Cukierman

Tel Aviv University - Eitan Berglas School of Economics; Interdisciplinary Center (IDC) Herzliyah; Centre for Economic Policy Research (CEPR)

Alberto Dalmazzo

University of Siena - Department of Economics

Date Written: October 2005

Abstract

This paper develops a framework for studying the interactions between labor unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labor taxes, the replacement ratio, labor market institutions and monetary policy-making institutions on economic performance in the presence of strategic interactions between labor unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labor taxes or in unemployment benefits to labors costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labor taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that higher levels of centralization and conservativeness induce government to set higher labor taxes if the replacement ratio and the tax wedge are sufficiently small.

Keywords: Central bank conservativeness, collective wage bargaining, competitiveness, inflation, labor taxes, redistribution, unemployment, unemployment benefits

JEL Classification: E5, E6, H2, J3, J5, L1

Suggested Citation

Cukierman, Alex and Dalmazzo, Alberto, Fiscal-Monetary Policy Interactions in the Presence of Unionized Labor Markets (October 2005). Available at SSRN: https://ssrn.com/abstract=851246

Alex Cukierman (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 540 5360 (Phone)
+972 3 640 9908 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

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Herzliya, 46150
Israel

HOME PAGE: http://www.tau.ac.il/~alexcuk/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alberto Dalmazzo

University of Siena - Department of Economics ( email )

Piazza S. Francesco, 7
Siena, I-53100
Italy
+39 0577 232 697 (Phone)

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