The EMU and the Wage Bargain

The European Economic and Monetary Union is a policy regime of low inflation. The central bank’s dominant objective is to achieve price stability, and the central bank has also the power and capacity to achieve this objective. However, we know from our study of the transmission of monetary impulses that the central bank can only indirectly achieve its main objective. So, the central bank should be interested in favourable economic conditions to pursue its monetary policy strategies. These conditions are dependent on how the other branches of economic policy behave so that a coordination problem arises. Not only fiscal policies can improve the efficacy of monetary policy strategies, as we have seen in lecture 5, but also the labour market parties, trade unions and employers’ associations, who collectively negotiate wages have to consider the macroeconomic implications of their agreements. Although these parties are private agents, they nonetheless bear responsibility in economic policy. Governments try, therefore, to commit the labour market parties to comply with the objectives of economic policy (‘incomes policy’). These governments’ influences on the wage bargain differ strongly between countries. The underlying problem is a common one, however, since collectively negotiated wages have a dominant impact on the wage level of a country and, consequently, on its price level.