The theory presented in the previous chapter has two broad empirical implications. First, it hypothesizes that economic performance is contingent on the particular mix of bargaining institutions and macroeconomic policy regimes. In a centralized bargaining environment we expect a flexible monetary regime to produce the best employment performance, especially if international growth is sluggish and centralization is associated with wage compression. Under these circumstances, labor has both the interest and the capacity to adopt a farsighted wage strategy that is compatible with the distributive interests of low-wage groups. If, on the other hand, the government is unable to reassure unions about its ability to sustain full employment (in the event of an unforeseen economic downturn, for example) or, more crucially, if the economic policy regime during low-growth periods leaves no or little scope for nominal wage increases, then solidaristic wage policies are likely to come into conflict with low-inflation targets.

Conversely, in an intermediately centralized bargaining system, policy flexibility may tempt sheltered unions to pursue militant strategies in the expectation that the government will, in its own (short-term) political interest, accommodate such wage increases through lax monetary and fiscal policies. In such an institutional environment, there are benefits to be reaped for the government from institutionalizing a commitment to a nonaccommodating policy. If such a commitment is perceived to be credible, it can deter militant union behavior and produce superior employment and inflation performance. When the commitment is not perceived to be credible (even if the government is in fact committed), the government will pay for this lack of credibility in the form of higher levels of unemployment. In decentralized bargaining systems, finally, the model predicts that monetary policy is either neutral or has small real effects.

The second broad implication is simultaneously normative and empirical. Normatively the model implies that only certain macroeconomic policies produce desired outcomes in given collective bargaining environments. In the conclusion to this chapter I focus specifically on the implications of the argument for monetary policy in the new Economic and Monetary Union in Europe. Empirically, we expect an association over time between the macroeconomic policy regime and the bargaining system.