Central Bank: Labor Market Centralization 4

Calmfors and Driffill (1988) seem to assume that as the number of unions becomes very large the relevant elasticity also becomes very large and the monopoly power of each union disappears; Cukierman and Lippi (1998) assume this explicitly. In that case, whether or not each internalizes the effects of its actions in that case becomes irrelevant. Those papers conclude that having many unions is good for welfare, while we conclude that it is bad. The difference results from different underlying models of how labor enters the production function and of competition in labor markets more.

Interactions between the number of unions and the degree of central bank conservatism

We can now consider the joint interaction of the number of unions and the degree of central bank conservatism. For the sake of brevity, we focus on the effect on only two variables: the level of employment (and, indirectly, output, which is monotonically related to the level of employment) and inflation. Moreover, we rely only on simulations, since algebraic expressions become quite unmanageable.

Consider two examples put together using the same parameter values as in the previous section. In Figure 4A we take up the case of a large 1 and therefore > 0. We see there that, for any level of CBC, the logarithm of employment is hump-shaped in the number of unions, as we showed before. Nonetheless, this non-monotonicity is very sharp for high levels of CBC, and much less so for low levels of CBC. In the limit, as /3g goes to zero (so that the central bank is indifferent to inflation), we know that the level of employment is equal to the first best regardless of the number of unions, so that the nonmonotonicity naturally disappears. In this case greater central bank conservatism is particularly costly when there are either very few or very many unions.

On the other hand, the decrease in employment that results from greater monetary conservatism is smaller the larger is the number of unions (the grid becomes flat for large n). This fits our earlier results, for we saw above that as 7i —> oo we are back in the standard model in which real economic performance is independent of the degree of central bank conservatism.
Fig. 4A: employment, CBC and n for large a

In Figure 4B, by contrast, a is small, so that сг (1 — a) w6802-16
Fig. 4B

Finally, we consider the joint effects of the number of unions and CBI on the rate of inflation. The relevant simulations (still using the same parameter values) are contained in Figures 5A and 5B:
Fig. 5A:
Fig. 5B: i