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266 Unemployment and Monetary Policy in the European Union
by the monetary authority responsible for price stability, foreshadowing a decline
in output and employment. Hence, society has a direct stake in preventing inflationary
wage settlements.
This suggests that the path of inflation, wages, and related items should be the
subject of regular tripartite consultation involving the “social parties,” government
(and the monetary authority), labor and employers plus the unemployed.
The object of the consultation would be to reach agreement on a consistent path
of nominal wages and prices, acceptable to labor, employers, the government and
one that the Central Bank is prepared to accommodate. This is essentially the procedure
that has been followed successfully in Italy since July 1992. It was largely
inspired by the dedicated work of a brilliant young labor economist and trade
union adviser, Ezio Tarantelli (see Tarentelli, 1988, pp. 556–561; 1995), who was
tragically murdered in March 1985 by the infamous Red Brigades for his efforts
to promote an understanding between labor and management. Wages and prices
have closely followed the agree upon declining path and labor relations have been
uncharacteristically peaceful. That agreement has recently withstood the stress of
a sizable devaluation, not due as in the past to excessive wage demands, but rather
to a loss of confidence in the country due to the squabbling between the political
parties about the appropriate financial program, even though the devaluation
has cost the workers some loss of purchasing power. At the moment this is creating
some concern with respect to the forthcoming renewal, which hopefully can
be resolved with a recouping of the exchange rate and some goodwill.
The basis for such a negotiation rests on an identity and a few other relations.
The identity states that the percentage change in the price level or the rate inflation—say
at an annual rate—is equal to the percentage change in the nominal
wage rate (wage inflation) minus the percentage change in the real wage rate
(wage inflation minus price inflation). This means that the negotiations can be
broken down into two separate components—one dealing with purely nominal
issues, namely price inflation, and the other with real issues, namely the
real wage.
6.2 Programming Inflation
Concerning the first component, we note that once the issue of the real wage has
been settled (along lines discussed below), one can achieve any desired inflation
target by simply setting the wage target at the targeted rate of inflation minus the
agreed change in the real wage.
Labor should be willing to accept any targeted range of rate of change in the
nominal wage, since it would have no effect on the real wage which has been set
separately, but only has an effect on inflation. In other words, labor has nothing
to gain but only to lose from a higher nominal wage increase, since it will be