DP331 | Macroeconomic Implications of Insider Power

Publication Date

01/07/1989

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Abstract

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.