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Wage bargaining structure and political budget cycles: A policy game approach

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  • Arabzadeh, Hamzeh

Abstract

Utilizing a panel dataset from OECD countries, this study unveils new evidence suggesting that the centralization of wage bargaining plays a significant role in mitigating Political Budget Cycles. To explain this empirical finding, the paper introduces a political economy model based on a policy game framework, encompassing three key agents: (i) an opportunistic government that decides on the level of budget deficits with the objective of enhancing its reelection prospects, (ii) workers/voters who decide on their sectoral affiliations, and (iii) unions that independently negotiate wages with firms. In this model, the opportunistic government has an incentive to run a budget deficit to favor the median voter, who is affiliated with non-tradable sectors. The mechanism emerges from the impact of debt-financed public spending on relative prices, and consequently, on relative wages between non-tradable and tradable sectors. Wage centralization mitigates the political incentive of opportunistic governments by attenuating the responsiveness of sectoral wages to sectoral prices, thereby pushing down budget deficits towards a socially more optimal level.

Suggested Citation

  • Arabzadeh, Hamzeh, 2026. "Wage bargaining structure and political budget cycles: A policy game approach," European Journal of Political Economy, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:poleco:v:92:y:2026:i:c:s0176268024000788
    DOI: 10.1016/j.ejpoleco.2024.102576
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    Keywords

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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