NOMINAL RIGIDITIES IN WAGE SETTING BY RATIONAL TRADE-UNIONS

Many rational wage setting schemes, such as the trade unions paradigm, are usually thought to lead to pure real rigidities. In this article we construct a model where a rational trade union without any kind of money illusion sets wage schedules in an economy subject to real and monetary shocks. We make the realistic assumption that wages can be conditioned on prices. It is found that, although the trade union has the option of fully insulating workers from nominal disturbances, it will rationally choose not to do so, and therefore nominal rigidities will be present in the economy.