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Is There Any Scope for Corporatism in Stabilization Policies?

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Is There Any Scope for Corporatism in Stabilization Policies? A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Di Bartolomeo, Giovanni; Acocella, Nicola; Pauwels, Wilfried Working Paper Is There any Scope for Corporatism in Stabilization Policies? Nota di Lavoro, No. 154.2004 Provided in Cooperation with: Fondazione Eni Enrico Mattei (FEEM) Suggested Citation: Di Bartolomeo, Giovanni; Acocella, Nicola; Pauwels, Wilfried (2004) : Is There any Scope for Corporatism in Stabilization Policies?, Nota di Lavoro, No. 154.2004, Fondazione Eni Enrico Mattei (FEEM), Milano This Version is available at: http://hdl.handle.net/10419/73921 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Is there any Scope for Corporatism in Stabilization Policies? Nicola Acocella, Giovanni Di Bartolomeo and Wilfried Pauwels NOTA DI LAVORO 154.2004 DECEMBER 2004 ETA – Economic Theory and Applications Nicola Acocella, Department of Public Economics, University of Rome La Sapienza Giovanni Di Bartolomeo, Department of Public Economics, University of Rome La Sapienza Wilfried Pauwels, Department of Economics, University of Antwerp This paper can be downloaded without charge at: The Fondazione Eni Enrico Mattei Note di Lavoro Series Index: http://www.feem.it/Feem/Pub/Publications/WPapers/default.htm Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract= 643623 The opinions expressed in this paper do not necessarily reflect the position of Fondazione Eni Enrico Mattei Corso Magenta, 63, 20123 Milano (I), web site: www.feem.it, e-mail: [email protected] Is There any Scope for Corporatism in Stabilization Policies? Summary This paper studies corporatism as the outcome of bargaining between the government and a representative labor union. When negotiations between these two parties only relate to macroeconomic stabilization, we show that corporatism can never be beneficial to both parties. As corporatist policies are nevertheless commonly observed in this context, we also discuss in an informal way possible explanations that reconcile the theory with actual observations. The policy implications of these explanations are also discussed. Keywords: Social pacts, Axiomatic bargaining, Unions, Issue linkage JEL Classification: E00, E58, E61, J50 An earlier version of this paper has previously circulated under the title “Corporatism as the outcome of an axiomatic cooperative solution between the government and a micro-founded trade union: A graphical illustration.” Nicola Acocella and Giovanni Di Bartolomeo gratefully acknowledge financial support from the University of Rome La Sapienza. Address for correspondence: Giovanni Di Bartolomeo University of Rome La Sapienza Department of Public Economics Via del Castro Laurenziano 9 00161 Rome Italy Phone: +39 (0) 649766329 E-mail: [email protected] 1. Introduction When studying how actual decisions of economic policy are made, bilateral or trilateral agreements between unions, employers’ associations and the government are often found to be rather common. Policies derived from such agreements are generally defined as corporatist (See OECD, 1997; Visser, 1998; Traxler and Kittel, 2000; Rhodes, 2001). These agreements often involve many issues rather than a specific one. Corporatist policies are claimed to result from the public nature of economic stabilization (see the references in Cubitt, 1995). However, the underlying reasons and dynamics of such agreements are less clear, and the theoretical literature has only made a few steps to investigate these questions. On the contrary, many economists, as e.g. Burda (1997), underline a “formal reticence” of researchers to develop models of corporatism.1 Observed corporatist policies are the result of negotiations among social partners and the government. Any analysis of such negotiations requires an understanding of the rules that guide the interaction among the participants (Olson, 1965; Keohane, 1984; North, 1990; Shepsle and Weingast, 1995). The rules that set the agenda and define the procedures of negotiations influence the scope of issues and the process for choosing among available alternatives. A powerful tool to formalize the negotiation mechanisms is provided by game theory. In particular, cooperative solutions can be interpreted as the result of a negotiation process, and the properties of cooperative solution concepts summarize the rules that guide the interaction among participants. In 1953 John Nash formally defined cooperation as “… situations involving two individuals whose interests are neither completely opposed nor completely coincident. The word ‘cooperation’ is used because 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 we are interested in this paper. Some exceptions to this reticence are Cubitt (1995), Acocella and Di Bartolomeo (2003), and Acocella et al. (2004). 2 the two individuals are supposed to be able to discuss the situation and agree on a rational joint plan of action, an agreement that should be assumed to be enforceable…” (Nash, 1953: 128). The above definition implies that, for cooperation to be implementable, mutual benefits for all the cooperating agents are essential. In this paper we apply this idea to the negotiations between a government and a trade union with the purpose to stabilize prices and employment. Our main result is negative. When starting from any noncooperative outcome, the trade union will never gain from cooperating. The government may lose from cooperating, or it could simply stay at the initial noncooperative outcome. In some cases, it may gain. Hence, efforts that attempt to promote corporatism with a view of achieving price and output stability are useless. These kinds of round tables are bound to fail. At the same time, however, casual observations show that such cooperative agreements are often quite common in practice. We will then also discuss possible explanations that may reconcile the theory with empirical observations. The paper is organized as follows. The next section describes the model. Section 3 derives various noncooperative solutions. Section 4 concerns cooperative solutions, and derives our main result against cooperation related to economic stabilization. We also check the robustness of our results for different noncooperative and cooperative solutions. Section 5 discusses alternative explanations of the observed cooperative behavior, and gives some hints for correct and successful policy recommendations. A final section concludes. 2. The model We consider a simple unionized economy in which a competitive firm uses labor to produce one final good. A monopoly trade union sets the nominal wage level, and a public policy maker (the government) controls aggregate demand. Formally, the simple economic setup is 3 described by an aggregate production function, an aggregate demand function, and the preferences of the two policymakers. The production function is yfn= () with fnn ()〉 0 and fnnn ()〈 0 (subscripts indicate derivatives), where y is real output and n is employment. Employment n is bounded between zero and n , the exogenously given labor supply. n is the full employment level of n. Competitive profit maximization requires fnn ()= ω , where ω is the real wage level. Labor −1 demand is given by nf= n ()ω . Aggregate supply of output is obtained as s −1 yq==()ω ff (n ())ω . Clearly, qω ()ω < 0. Aggregate demand is given by a function ydpmd = (, ), where p is the absolute price level,2 and m represents a policy variable (e.g. money supply), controlled by the government. We assume that dpmp (, )< 0. The sign of dpmm (, )depends on the exact interpretation of m which we will leave open.3 Let w be the nominal wage level. Equilibrium on the output market requires that qw(/) p= d (,) pm. The wage level w is assumed to be controlled by the trade union, while the government controls m. We assume that, for any combination (,wm ), the price level p instantaneously adjusts to realize equilibrium on the output market. The preferences of the two policy makers are represented by the following payoff functions. T T The trade union’s payoff function is denoted by π (,n ω ), with πωn (,n )> 0 and T πωω (,n )> 0 (for a microeconomic foundation, see Oswald (1985)). The government’s G G G payoff function is denoted by π (,yp ), with π y (,yp )> 0and π p (,yp )< 0. Both
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