This work draws a relationship among three macroeconomic facts underway since the 1980s: (i) the decrease in workers' bargaining power, (ii) the increase in the contribution of the number of workers (extensive margin) relative to hours per employee (intensive margin) in the cyclical adjustment of the labour input and (iii) the flattening of the Phillips curve. The paper uses a theoretical model and tests its implications based on Italian and euro-area data.
The theoretical model shows that the lower is workers' bargaining power, the more firms react to changes in demand by adjusting the extensive margin rather than the intensive one. This shrinks the cyclical movements of inflation, as the marginal cost increases with the number of hours per employee. The empirical analysis confirms these conclusions and indicates that the weakening of workers' bargaining power is a key factor behind the flattening of the Phillips curve.