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Is there any scope for corporatism in macroeconomic policies?

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Abstract

This paper studies corporatism as the outcome of bargaining between the government and a representative labor union. We show that if negotiations between these two parties only relate to macroeconomic policies and unions are not assumed to be inflation-averse, corporatism can never be beneficial to both parties. As corporatist policies are nevertheless commonly observed in this context, we discuss possible explanations that reconcile the theory with actual observations. The policy implications of these explanations are also discussed.

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Notes

  1. In particular, the “formal reticence” is related by Burda to the remarkable imprecision with which the concept is defined. The reticence is even more pronounced with reference to the kind of corporatism in which we are interested in this paper. Some exceptions to this reticence are Cubitt (1995), Acocella and Di Bartolomeo (2007), and Acocella et al. (2007).

  2. Sometimes corporatism is intended as centralization of wage setting. This is the object of a number of contributions (see, e.g., Horn and Wolinsky 1988; Calmfors and Driffill 1988; Layard et al. 1991; Pekkarinen et al. 1992; Teulings and Hartog 1998; Acocella and Di Bartolomeo 2004a).

  3. Although the argument is old, it has been fully modeled only recently (see, among others, Cukierman and Lippi 1999; Coricelli et al. 2006).

  4. This can explain social pacts in other contexts (see Acocella et al. 2007).

  5. We assume the parametrically initial price is equal to zero. We can then talk of inflation and current prices interchangeably (Cubitt 1995: 247).

  6. A similar game is described by Cubitt (1995). Our assumption that the trade union does not affect aggregate demand is not essential. It is introduced only to simplify the exposition.

  7. Alternatively, firms can be considered as a player (follower) that, given the real wage, sets employment and output as a strategic variable. See, e.g., Coricelli et al. (2006). However, the issue is a purely terminological one.

  8. It is worth noticing that we have assumed d p (p, m) < 0. According to (2), if d p (p, m) were zero, in (3) ‘inequality’ would be substituted by ‘equality.’ In this case the trade union would not be able to control the real wage level: a one percent change in w would always lead to a one percent change in p, leaving the real wage unchanged.

  9. See Acocella and Di Bartolomeo (2004b) for monetary policy neutrality in a similar context.

  10. This approach has been also used by Cubitt (1995) in a linear quadratic context. He generalizes Gylfason and Lindbeck’s (1994) results, emphasizing the role of union’s inflation aversion as rationale for corporatist agreements (see also Acocella and Di Bartolomeo. 2007). However, the social pact feasibility strictly depends on the fact that the union is adverse to inflation per se, which is at odds with the unions’ micro-foundations (see Oswald 1985 or Booth 1995: Chap. 4, for a survey). Thus we discuss this assumption later, when an alternative framework will be considered.

  11. See Cukierman (2004) for a recent survey.

  12. Among a wide number of papers see e.g. Cubitt (1992, 1995), Detken and Gärtner (1994), Lawler (2000a, b), Lippi (2002), Acocella and Di Bartolomeo (2004a, b), and Di Bartolomeo and Pauwels (2006).

  13. The model is quite general. For further details on its micro-foundations, see Acocella et al. (2008). See also Cubitt (1992) or Di Bartolomeo and Pauwels (2006).

  14. As usual we assume an initial price equal to zero thus we can interchangeably speak of inflation and price level.

  15. See Soskice and Iversen (1998, 2000), Coricelli et al. (2006), Cukierman and Lippi (2002), Lawler (2005).

  16. Equation (16) is the union’s employment function stemming from a traditional labor demand derived by real profit maximization assuming a Blanchard and Kiyotaki’s (1987) firm’s demand. It refers to the micro disaggregated equilibrium condition, which is fully compatible with the other two macro relationships previously described (for technical details, see Acocella et al. 2008).

  17. In such a model Nash equilibrium and the Stackelberg equilibrium with union leadership are different: see Acocella et al. (2008) for a discussion. This, however, does not affect our argument, since union coordination leads to the same outcomes irrespectively of which of the two non-cooperative solutions is considered.

  18. More precisely it is the coefficient of the reaction function of the government with respect to the aggregate nominal wage.

  19. The same is true if international wage-setting externalities are considered in a two-country model. No cross externalities between unions and governments exist and for the unions all coalitions different from that of all the unions, which implies government policy neutrality, are suboptimal (see Acocella and Di Bartolomeo 2004a).

  20. Bargaining on environment could be linked to negotiations on trade or arms control or other issues.

  21. Technically the issue linkage enlarges the payoff space and often increases the benefits of cooperation for all players.

  22. The idea of issue linkage has been introduced also as a way to increase cooperation on issues where the incentives to free ride are particularly strong. The purpose of issue linkages has been then to determine under which conditions players actually prefer to link the negotiations on two different issues rather than negotiating on the two issues separately. This has been investigated in the context of endogenous coalition formation (see Carraro and Marchiori 2003).

  23. Notice that, in the case of issue linkages the vector t corresponds to the values of the two instruments geared by both players, whereas in the case of a side payment it would correspond to a unique instrument, unilaterally geared by the government to the end of reaching a cooperative agreement.

  24. The meaning we attribute to the term “political exchange” is rather limited, as we refer to situations where the quid pro quo for wage moderation lays in the realm of politics, more than in that of economics. Other authors speak of political exchange in a more comprehensive way, as they include in the counterpart to unions increased public sector expenditure, compensating social policies (which we have referred to as cases of side payments), or employment protection (which in our case is the result of an issue linkage) (see Visser 2002: 10).

  25. This is often demanded by unions, particularly in times when the degree of unionization tends to decrease. But there are cases in which governments ask for legitimacy, as it happened not only occasionally in the cases of France and Italy cited before, but also on a regular basis in Austria, where, as declared by the first president of the OGB, Bohm, no government could be formed without the support of the unions (Tarantelli 1986: 183). There are also cases where some kind of legitimacy (i.e., controlling the labor force, or preventing unions from deploying ‘whipsawing tactics’ against isolated employers) is sought by employers’ associations through social pacts (Traxler 2003: 3).

  26. In a different context, the importance of the political relationship between the governments and labor unions has been stressed also by Alvarez et al. (1991), Detken and Gärtner (1994), and Franzese (1999). However, empirical evidence also suggests caution about the size of these effects (see e.g. Woldendorp and Keman 2006).

  27. For instance in Belgium refunding of medical expenditures as well as unemployment benefits are directly managed by labor unions.

  28. Of course, when we say that unions are not inflation averse, we do not mean that unions do not care about inflation at all, but only that they are not interest in it for reasons other than the erosion of the real wages of their members.

  29. See Oswald (1985) or Booth (1995: Chap. 4) for a survey.

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Acknowledgments

We gratefully acknowledge two anonymous referees for their useful comments on a previous version. Nicola Acocella gratefully acknowledges financial support from the University of Rome La Sapienza. Wilfried Pauwels also gratefully acknowledges financial support from the National Bank of Belgium.

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Authors and Affiliations

  1. Dipartimento di Studi Geoeconomici, Università di Roma, ‘La Sapienza’, Via Castro Laurenziano, 9, 00161, Rome, Italy

    Nicola Acocella

  2. University of Teramo, Teramo, Italy

    Giovanni Di Bartolomeo

  3. University of Antwerp, Antwerp, Belgium

    Wilfried Pauwels

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  1. Nicola Acocella
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  2. Giovanni Di Bartolomeo
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Correspondence to Nicola Acocella.

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Acocella, N., Di Bartolomeo, G. & Pauwels, W. Is there any scope for corporatism in macroeconomic policies?. Empirica 37, 403–424 (2010). https://doi.org/10.1007/s10663-009-9115-6

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