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Volatility, Stabilization and Union Wage‐setting: The Effects of Monetary Policy on the ‘Natural’ Unemployment Rate
Author(s) -
Bonatti Luigi
Publication year - 2002
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00074
Subject(s) - economics , wage , unemployment , volatility (finance) , inflation (cosmology) , variance (accounting) , natural rate of unemployment , wage rate , monetary policy , monetary economics , labour economics , unemployment rate , macroeconomics , econometrics , physics , accounting , theoretical physics
In a unionized economy with nominal‐wage contracts, the ‘natural’ (rational‐expectations equilibrium) employment level is not invariant with respect to the stabilization rule followed by the monetary authority. This is because alternative monetary policies change the variance of the inflation rate (price level) relatively to the variance of some measure of economic activity (employment level), thereby influencing the trade‐off desired by union members between the real wage and the probability of employment. Indeed, a more volatile employment level induces the (risk‐neutral) union members to prefer a higher expected real wage. (J.E.L: E5, J5).