Efficient bargaining in a dynamic macroeconomic model

This chapter analyzes the implications of efficient wage–employment bargaining in a closed monetary macroeconomic model of the AS-AD type with a government sector and fiat money. The consumption sector is made up of heterogeneous consumers - shareholders and workers - with endogenous labor supply and an endogenous reservation wage.Unique temporary equilibria exist for all levels of bargaining power. These induce the determination of real allocations as well as nominal prices, wages, savings, and deficits. The comparative-statics analysis shows in particular that an increase of union power induces negative output and employment effects under a negative general-equilibrium price feedback. Equilibria under efficient bargaining are not Second-Best optimal.The chapter concludes describing the evolution of such economies under perfect foresight and discusses the role of union power for existence and stability. Due to endogenous budget deficits/surpluses, stationary states fail to exist generically. The stability analysis distinguishes between the dynamics in nominal terms and the evolution of the real economy. The associated concepts of convergence to characterize balanced monetary expansion are introduced. Fiscal policy parameters and union power exhibit structural tradeoffs for the existence of balanced paths and their stability.