The Labor Market

This paper analyzes the case for fiscal federal transfers in a Monetary Union. Looking at the labor market structure, it emphasizes the incentive effect of any federal transfer scheme insuring workers against bad draws. When the wage negociation process occurs at the national level and the federal government has incomplete information on the bargaining process, workers have an incentive to ask ex-ante for higher wages. This may negatively affect the macroeconomic performance in the federation. The First Best solution consists in shifting the wage bargaining process from the national to the federal level. Decentralization of fiscal policy would solve the incentive problem. However, looking at the fiscal federalism issue, we show that it is always optimal to keep federal transfers. Moreover, decentralized policies are only effective when access to financial markets is imperfect. Thus the paper makes a strong case in favor of centralization. Transferts federaux, decentralisation et marche du travail RtSUMt. Cet article analyse les merites compares de politiques fiscales federales et nationales au sein d'une Union Monetaire. Les transferts federaux s'apparentent a une police d'assurance et peuvent modifier les incitations economiques des agents. Une politique fiscale decentralisee, par contre, lisse les chocs de revenus intertemporellement et ne deforme pas les incitations. Cependant, cet article (1) demontre qu'il est optimal de conserver les transferts fed6raux et (2) suggere qu'une politique decentralisee peut reduire le bien-etre ex-ante de l'Union en permettant une forme de renegociation ex-post des transferts federaux. * P. 0. GOURINCHAS: ENPC-CERAS, Stanford Graduate School of Business. I thank Rudiger Dornbusch, Daron Acemoglu, Ricardo Caballero and Charles Wyplosz for comments and suggestions on an earlier version. All errors remain mine. This paper was presented at the International Conference on "Decentralization and the Economic Organization of Space", held in Marseilles, June 16-17 1994.