ABSTRACT
This chapter introduces the possibility of international migration into a simple monetary policy game between governments and trade unions. It considers a small open economy that takes all foreign variables as given and the case of some interdependent economies. Since changes in the effective labour force will affect unemployment levels, they will also affect the objectives of both players. In particular, a real wage differential against the home country is assumed to lead to a labour flow from the home country to the rest of the world. A large initial labour force requires a higher level of employment to maintain low unemployment. In the home union’s reaction function, the home nominal wage and the initial labour force l0 are negatively related: a large initial labour force will require the home union to set a low nominal wage in order to keep unemployment low.
