Aspirations, bargaining power, and macroeconomic performance

A model of aggregate wage and price setting is developed that nests competing hypotheses concerning the role of worker' aspirations and bargaining power in the wage bargain. It is shown that although aspirations and bargaining power always affect inflation in the short run, there is disagreement as to whether or not they influence macroeconomic performance in the long run. Empirical results suggest that a model in which aspirations and bargaining power affect the long-run rate of unemployment best fits the data and most accurately forecasts the rate of inflation. The implications of this result for the potential future performance of the U.S. economy and for macroeconomic policy are explored.