Relative Wages in Monetary Union and Floating

Abstract

We analyse a small open economy with a tradable and a sheltered sector. If the unions that operate in each sector coordinate their wage demands sectorwise, the choice of monetary regime - floating cum inflation target vs EMU - may affect the relative wages and prices of the economy. We show that EMU results in lower prices for tradable goods and lower real wages in the traded sector while opposite results hold for sheltered sector prices and wages. Thus, if large unions behave strategically, the choice of monetary regime has far-reaching structural implications.Trade unions; Wage bargaining; EMU; Monetary policy