THE INTERACTION OF MONETARY-POLICY AND WAGES

This paper focuses on the interaction of monetary policy and wage form ation in economies with strong labor unions. Government and unions are viewed as endogenous utility maximizers and the macroeconomic consequ ences of their strategic interaction are explored with the aid of some elements of simple game theory. Specifically, it is shown (a) how lab or unions adjust wages to prices so as to maximize their utility follo wing changes in monetary policy; (b) how the effectiveness of monetary policy is circumscribed without necessarily being nullified by the ut ility-maximizing reactions of unions; and (c) how the interplay of gov ernment and unions can create a persistent tendency towards inflation and unemployment simultaneously.