The simple macroeconomics of labor unions

From Nick Rowe, via Scott Sumner:

If all prices are sticky, then an expansionary monetary policy, which increases aggregate demand, increases output and makes everyone better off. That's why booms are good, because it brings the economy closer to the competitive equilibrium. And why recessions are bad, because they take the economy further away from the competitive equilibrium.

And cartels, like labour unions, just make the problem worse. Because by joining together with similar sellers into a group, the demand curve facing the group is  steeper than the demand curve facing the individual, since members of the group no longer compete against each other for buyers. So there is an even bigger difference between the downward-sloping trade-off facing the group of sellers and the horizontal trade-off facing us all.

Unions are bad for the very same reason that recessions are bad.

All New Keynesian macroeconomists have understood the above for the last 20 years. Which is why all New Keynesian macroeconomists are fundamentally opposed to cartels, labour unions, minimum wage laws, etc.. OK. It's why they should be opposed to such things.

But alas, we do not quite find consistency on these issues…


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