DP331 Macroeconomic Implications of Insider Power

Author(s): Assar Lindbeck, Dennis J. Snower
Publication Date: July 1989
Keyword(s): Collective Bargaining, Employment, Government Policy, Hysteresis, Negotiations, Unions, Wages
JEL(s): 821, 822, 831, 832
Programme Areas: International Macroeconomics, Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=331

The paper constructs a simple macroeconomic model that contains a labor market in which insiders have power in wage negotiations. Wage and employment decisions are assumed to be made before business conditions are known; thus these decisions depend on both the hiring costs and expected dismissal costs. The paper analyzes the short and long-term implications for the effectiveness of various government policies on production, employment, and pricing. Hysteresis is shown to be a special case in a continuum of symmetric long-term policy effects. A rationale for asymmetric policy effects is presented as well.