NOMINAL WAGE FLEXIBILITY IN A PARTLY-UNIONIZED ECONOMY

Abstract

I INTRODUCTION This paper explores equilibrium wage determination in an economy where labour markets may differ-some may be unionized, some competitive and some with rigid wages. In practice, no economy has completely uniform labour markets and it is an important question to ask how the different types of market might interact to influence the macroeconomic properties of the economy. This paper concentrates on the response of nominal wages to demand changes. As we shall see, what happens in the unionized sector depends very much on what is happening in the other sectors, because of inherently intersectoral effects. In representative sector macro models (Blanchard and Kiyotaki, 1987; Dixon, 1987; inter ah), these effects will not be present since nominal and real wages (and prices) will be uniform across sectors. The main importance of the results is that the economy can display a whole range of macroeconomic behaviour from Classical to Keynesian, depending on the precise microeconomic structure of the economy. It is useful to distinguish between real and nominal wage rigidity. Nominal wage rigidity occurs when wages respond to neither the general price level nor the level of demand; real rigidity occurs when wages respond to the price level, but not demand. The interaction of different types of rigidity (or their absence) across sectors leads to interesting and surprising results (see Ball and Romer, 1990, who illustrate this point in a different model). This is because, in addition to the direct partial equilibrium effects of a demand change on wages in a particular sector, there are the indirect general equilibrium effects. These intersectoral effects include changes in the cost of living, and changes in relative prices which can alter budget shares and elasticities. As we shall see, these indirect effects can be crucial. In the unionized sectors, there are several “syndicates” which influence wages by restricting employment, as in Hart (1982). Real wages depend upon the number of unions, the disutility of labour and the elasticity of labour demand. In the rigid sectors, there is complete nominal wage and price