Comment on C. Pissarides, “Dynamics of Unemployment, Vacancies and Real Wages with Trade Unions”

Abstract

In this elegantly written paper, Pissarides attempts an ambitious task of synthesizing two seemingly unrelated ideas which originate with two opposing economic thinkers, John M. Keynes and Milton Friedman, into a coherent macro dynamic model: labour’s main concern is not its real wages, but its relative wages (Keynes); and real wages do not respond quickly to unanticipated shocks, but temporary deviations of unemployment from “natural” equilibrium is a prerequisite to real wage adjustment (Friedman). In order to pursue this task, Pissarides builds and analyzes a clever macro model in which decentralized bargaining between the representative firm and the representative union à la Nash forms a very important component. In my opinion, such models yield important insights in the workings of the modern economy dominated by large corporations and unions. Pissarides enriches the class of bargaining models by initiating dynamic analysis and he should be congratulated on that.