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Government Fiscal Efforts vs. Labour Union Strikes: It Takes Two to Tango

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  • Massimiliano Castellani

    ()
    (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy)

  • Luca Fanelli

    ()
    (Department of Statistical Sciences, University of Bologna, Italy)

  • Marco Savioli

    ()
    (Department of Economics, University of Siena, Italy; The Rimini Centre for Economic Analysis, Italy; School of Economics, Management, and Statistics, Rimini campus, University of Bologna, Italy)

Abstract

In this paper, we propose a novel policy-game model to analyze the simultaneous interaction between the government and the labour union in a unionized economy. Our model explains how the economic and political interaction between labour unions, concerning wages and strikes, and the government, dealing with unemployment and fiscal policy, gives rise to a long run Cournot-Nash equilibrium. We estimate the policy-game model by a cointegrated Vector Autoregressive system using Italian quarterly data (1960-2009) on government budget surplus (fiscal efforts) and on hours not worked (strikes) and the speed of their long run adjustment. At equilibrium, a rise in unemployment has a negative effect on the level of effort and strike, while a rise in wages has a positive and negative effect on the level of effort and strike, respectively. A phase diagram interpretation of the estimated model is provided and some policy implications are discussed.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 33_13.

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Date of creation: Jun 2013
Date of revision: Jan 2014
Handle: RePEc:rim:rimwps:33_13

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Keywords: Fiscal efforts; strikes; policy game; VEqC; speed of adjustment;

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References

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  1. Fanelli, Luca & Paruolo, Paolo, 2007. "Speed of Adjustment in Cointegrated Systems," MPRA Paper 9174, University Library of Munich, Germany.
  2. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
  3. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  4. Davig, Troy & Leeper, Eric M., 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," CEPR Discussion Papers 7509, C.E.P.R. Discussion Papers.
  5. Gylfason, Thorvaldur & Lindbeck, Assar, 1991. "The Interaction of Monetary Policy and Wages," CEPR Discussion Papers 551, C.E.P.R. Discussion Papers.
  6. Manning, Alan, 1991. "The Determinants of Wage Pressure: Some Implications of a Dynamic Model," Economica, London School of Economics and Political Science, vol. 58(231), pages 325-39, August.
  7. Mumford, Karen, 1993. "A Critical Comparison of Models of Strike Activity," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 285-312, August.
  8. Ondřej Schneider & Jan Zápal, 2005. "Fiscal Policy in New EU Member States: Go East, Prudent Man!," Working Papers IES 76, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  9. Kåre Vernby, 2007. "Strikes are more common in countries with majoritarian electoral systems," Public Choice, Springer, vol. 132(1), pages 65-84, July.
  10. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2012. "Fiscal Stimulus with Spending Reversals," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 878-895, November.
  11. Azam, Jean-Paul & Salmon, Claire, 2003. "Strikes and Political Activism of Trade Unions: Theory and Application to Bangladesh," IDEI Working Papers 166, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Shu-Chun S. Yang & Todd B. Walker & Eric M. Leeper, 2010. "Government Investment and Fiscal Stimulus," IMF Working Papers 10/229, International Monetary Fund.
  13. Kennan, John & Wilson, Robert, 1989. "Strategic Bargaining Models and Interpretation of Strike Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S87-130, Supplemen.
  14. Paruolo Paolo, 2003. "Common dynamics in I(1) VAR systems," Economics and Quantitative Methods qf0316, Department of Economics, University of Insubria.
  15. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  16. Kongsted, Hans Christian, 2005. "Testing the nominal-to-real transformation," Journal of Econometrics, Elsevier, vol. 124(2), pages 205-225, February.
  17. Chiarini, Bruno & Piselli, Paolo, 1997. "Wage Setting, Wage Curve and Phillips Curve: The Italian Evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 44(5), pages 545-65, November.
  18. Gernot Müller & Giancarlo Corsetti & André Meier, 2009. "Fiscal Stimulus with Spending Reversals," IMF Working Papers 09/106, International Monetary Fund.
  19. von Hagen, Jurgen & Hughes Hallett, Andrew & Strauch, Rolf, 2002. "Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence," Journal of the Japanese and International Economies, Elsevier, vol. 16(4), pages 512-535, December.
  20. Ardagna, Silvia, 2004. "Fiscal stabilizations: When do they work and why," European Economic Review, Elsevier, vol. 48(5), pages 1047-1074, October.
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