MACROECONOMIC POLICY IN A LARGE UNIONIZED ECONOMY

This paper models an economy with many sectors. In each sector a monopoly union sets the nominal wage, and then firms choose output. The economy is large in that all agents treat the general price level as fixed. The paper focusses on policy effects on employment. An increase in government expenditure in one sector will increase (decrease) total employment as sectoral employment is above (below) average. A general increase in government expenditure in fixed proportions will have a positive employment multiplier below unity. Policy which increases employment will lead to higher welfare. © 1991.