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A Real-Business-Cycle Model with Reciprocity in Labor Relations and Fiscal Policy: The Case of Bulgaria

Author

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  • Aleksandar Vasilev

    (Department of Economics, American University in Bulgaria)

Abstract

In this paper we introduce reciprocity in labor relations and government sector to investigate how well the real wage rigidity that results out of that arrangement explains business cycle fluctuations in Bulgaria. The reciprocity mechanism described in this paper follows Danthine and Kurmann (2010) and is generally consistent with micro-studies, e.g. Lozev et all. (2011) and Paskaleva (2016), while at the same time comes into contrast with models with efficiency wages of no-shirking type that emphasize the importance of aggregate labor market conditions as the main determinant in wage setting, e.g. Vasilev (2017). Rent-sharing considerations, and worker's own past wages turn out to be the most important aspects of how labor contracting happens. In contrast, aggregate economic conditions, as captured by the employment rate, are not found to be quantitatively important for wage dynamics. Overall, the model with reciprocity and fiscal policy performs well vis-a-vis data, especially along the labor market dimension, and in addition dominates the market-clearing labor market framework featured in the standard RBC model, e.g Vasilev (2009).

Suggested Citation

  • Aleksandar Vasilev, 2017. "A Real-Business-Cycle Model with Reciprocity in Labor Relations and Fiscal Policy: The Case of Bulgaria," Bulgarian Economic Papers bep-2017-03, Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski - Bulgaria // Center for Economic Theories and Policies at Sofia University St Kliment Ohridski, revised Mar 2017.
    • Handle: RePEc:sko:wpaper:bep-2017-03
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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