THE (DAMPENED) WAGE-PRICE SPIRAL: CONFLICT, ENDOGENOUS MARKUP AND INFLATION

Abstract

We develop an inflation model in which firms desired markups are determined through a bargaining between employees and employers, whose outside option is the interest rate on costs that is, the interest rate is an opportunity cost for investing production through employing labor and, thus, becomes a source of markup shock. Firms set a nominal price targeting this real desired markup but only some firms are able to fully protect real profits from expected inflation. Nominal wages are determined by an indexation to expected inflation coefficient, autonomous wage pressures and unemployment level. Endogenously, real profits, real wages and inflation are determined. Outcomes will differ with respect to the possibility of permanent changes in distribution and which economic regime will prevail: ‘accelerationist’ or steady-state inflation. The objective is understanding the relation between the wage inflationary structural pressure, real profits and price inflation and answering the following questions: do wages growing above productivity cause steady-state inflation or accelerating inflation? Do real profits return to any equilibrium level? Does exist a NAIRU?