This paper focuses on the interaction of monetary policy and wage formation in economies with strong labour unions. Government and unions are viewed as endogenous utility maximizers, and the macroeconomic consequences of their interaction are explored with the aid of some elements of game...

The paper constructs a simple macroeconomic model that contains a labor market in which insiders have power in wage negotiations. Wage and employment decisions are assumed to be made before business conditions are known; thus these decisions depend on both the hiring costs and expected dismissal...