Counterinflationary Policy in a Unionised Economy with Nonsynchronised Wage Setting

Abstract

A model of the determination of wages and employment in a unionised economy with nonsynchronised wage setting is presented in this paper. It is shown that a monetary deflation can lead to prolonged unemployment even though the unions act rationally and with full information about the change in policy. The model generates a “statistical” Phillips curve in which the rate of change of money wages depends on the anticipated growth rate of the money supply and on “disequilibrium” unemployment. Conventional incomes policies are shown to have desirable social effects, but run counter to the perceived self-interest of the trade unions and are therefore likely to be resisted. Taxes on wage increases have desirable long-run effects, but do not appear able to reduce the transitional unemployment costs of monetary deflation.

I am grateful to many people, and especially to C. Bean, W. Buiter, L. Calmfors, J. Fender, G. Fethke, D. Grubb, T. Gylfason and R. Layard for helpful comments and discussion and to the ESRC for financial assistance.