Bargaining Power and the Phillips Curve: A Micro-Macro Analysis
65 Pages Posted: 10 Dec 2020
Date Written: November 11, 2020
We use a general equilibrium model to show that a decrease in workers’ bargaining power amplifies the relative contribution to the output gap of adjustments along the extensive margin of labour utilization. This mechanism reduces the cyclical movements of marginal cost (and inflation) relative to those of the output gap. We show that the relationship between bargaining power and adjustments along the extensive margin (relative to the intensive margin) is supported by microdata. Our analysis relies on panel data from the Italian survey of industrial firms. The Bayesian estimation of the model using euro-area aggregate data covering the 1970-1990 and 1991-2016 samples confirms that the decline in workers’ bargaining power has weakened the inflation-output gap relationship.
Keywords: low inflation, bargaining power, Phillips curve
JEL Classification: E31, E32, J23, J60
Suggested Citation: Suggested Citation