The wage bargaining structure and the inflationary bias

Abstract

The failure of some disinflation programs has been associated with their inability to bring wages down with other nominal variables. This issue is analyzed in a model with many trade unions. The inflationary bias that characterizes the one-shot game equilibrium is an increasing function of the gap between the unions and the government real wage targets. This gap, in turn, depends on whether sectoral unions cooperate or set wages separately. A non-inflationary cooperative equilibrium can be sustained as a subgame perfect and weakly renegotiation proof equilibrium in the infinitely repeated game, provided the unions are sufficiently “patient.”