Monetary Institutions, Monetary Union and Unionized Labor Markets - Some Recent Developments ∗

Abstract

This paper is a selective survey of recent developments regarding the strategic interaction between labor unions and the monetary authority. Since Rogoff (1985) influential work a basic tenet of the literature on strategic monetary policy with competitive labor markets is that, abstracting from stabilization policy, the level of central bank conservativeness (CBC) affects inflation but not real variables. An important general message of the burgeonning literature on unionized labor markets and monetary institutions is that, when wage settlements are centralized within a small or moderate number of unions, CBC affects inflation as well as real variables like unemployment, output and real wages. This insight and the analytical frameworks that underly it are particularly relevant for European economies in which the fraction of the labor force covered by collective agreements is large and in which wage bargaining institutions are frequently rather centralized. Most of the recent literature on the strategic interaction between the central bank (CB) and unions shares two basic presumptions. First, nominal wages are contractually fixed for a certain period of time to which I shall refer as the ’contract period’. Second, monetary

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