Embedding labor union to a small open economy model

General DSGE Modeling
1

Hello Everyone

I have managed to derive the Small Open Economy (SOE) model. I have also managed to derive the labour union model called the Right-to-Manage (RTM) model which is determining the wage rate and has a coefficient of the bargaining power/strength of labour union that i want to use in my project.

However, the problem is how to embed the RTM labour union model into the SOE model considering that the SOE model I have derived, already has the labour demand and the labour supply equations which are determining the wage rate.

In the RTM model, the union and the firm are engaged in the bargaining process to determine wages. The bargaining is a real but not nominal process, yet the SOE model I have managed to derive is a nominal model.

How do i solve these 2 problems?

2

I am not sure I understand the problem. You would need to replace the labor supply and demand equations by the new ones. One question is whether, in a model with nominal frictions, bargaining would be about nominal or real wages. Technically, both should be feasible. You can always link the nominal and real concepts in the model.

3

Thank you very much for your insights.