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The Effect of Collective Bargaining and Central Bank Independence on Inflation and Unemployment: Evidence From the OECD


  • Chou, Y.K.


In this paper, panel data from 15 OECD countries (1971-1990) are used to test the hypothesis that differences in monetary and labour market institutions explain a significant portion of the surprisingly diverse inflation and unemployment experiences among similarly developed economies. As an alternative to the measures of centralization of wage bargaining and corporatism used in previous studies, a Hefindahl index of union concentration is used as a proxy for the degree of coordination failure extant in wage setting. Additional explanatory variables used include union density, union coverage and the level of wage bargaining. We observe that inflation has a hump-shaped relationship with central bank independence and union density, as well as a negative relationship with union concentration, while unemployment has a U-shaped relationship with union density, and a hump-shaped relationship with union concentration and central bank independence. These findings are largely robust to the use of alternative estimators and assumptions on the structure of the error term. Further results are obtained from stratifying the sample by central bank independence and union concentration. These are then compared with the contrasting predictions of two recent theoretical models. Finally, we show that high union concentration is associated with smaller deviations of actual inflation rates from predicted rates in the aftermath of the 1973-74 OPEC price shock.

Suggested Citation

  • Chou, Y.K., 2000. "The Effect of Collective Bargaining and Central Bank Independence on Inflation and Unemployment: Evidence From the OECD," Department of Economics - Working Papers Series 770, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:770

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    References listed on IDEAS

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    Cited by:

    1. C. Bowdler & L. Nunziata, 2007. "Trade Union Density and Inflation Performance: Evidence from OECD Panel Data," Economica, London School of Economics and Political Science, vol. 74(293), pages 135-159, February.
    2. Cavallero, Alessandro, 2011. "The convergence of inflation rates in the EU-12 area: A distribution dynamics approach," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 341-357, June.
    3. Chou, Y.K., 2001. "The Impact of Central Bank Independence and Union Concentration on Macroeconomic Perfromance in the Presence of Aggregate Supply Shocks. Evidence from 10 OECD Countries (1971-85)," Department of Economics - Working Papers Series 805, The University of Melbourne.

    More about this item



    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects


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