Comment on E. J. Driffill, “Macroeconomic Stabilization Policy and Trade Union Behavior as a Repeated Game”

Abstract

Driffill’s paper is motivated by the notion that government concern over the level of unemployment enables unions to obtain higher real wages than they otherwise would, with the paradoxical result that stabilization policy raises the average unemployment rate. A closely related problem has been studied by Barro & Gordon (1983), in the context of the inflation unemployment tradeoff. In that case, government attempts to reduce the unemployment rate end up creating higher inflation, the process reaching equilibrium when the marginal cost of inflation to the government is equal to the putative gain that would be obtained from lower (though unattainable) unemployment.