Are “fair” wages quantitatively important for business cycle fluctuations in Bulgaria?

We introduce “fair” wages in a general-equilibrium model where worker’s effort is unobservable and investigate whether such a mechanism can quantitatively account for the degree of real wage rigidity in the Bulgarian labor markets, as documented in Lozev, Vladova, and Paskaleva (2011) and Paskaleva (2016). In contrast to Danthine and Kurmann (2004), we internalize the effect that past wages have on the current effort level. We calibrate the model to Bulgarian data (1999-2016), and quantify the effect of technological shocks on hours and wages in the theoretical setup. Overall, the calibrated model with “fair” wages performs poorly when it comes to the relative volatilities of labor market variables. This is because aggregate labor market conditions, as proxied by the employment rate and past aggregate wages, turn out not to be quantitatively important for business cycles in Bulgaria.

REAL WAGE RIGIDITY, HETEROGENEITY, AND THE BUSINESS CYCLES

This paper investigates the quantitative implications of real wage rigidities and heterogeneity for two long-lasting puzzles in the business cycle literature: the low correlation between total hours worked and labor productivity and the large volatility of the labor wedge, defined as a gap between the marginal rate of substitution of aggregate leisure for aggregate consumption and the marginal product of aggregate labor. I shed light on these issues by extending a heterogeneous-agent model with an indivisible labor supply choice to real wage rigidities. I find that a small amount of real wage stickiness would be sufficient to resolve both anomalies when long-term wage contracts and heterogeneity are taken into account.

EXPECTATION EFFECTS OF REGIME SHIFTS ON LABOR MARKET DYNAMICS

This paper shows that expectations of possible future regime shifts can contribute to recent deep downturn and stagnant recovery in the US labor market. Apart from the current economic regimes, rational agents consider how regimes will unfold in the future and form their expectations based on the probability of occurrence. Possible regime shifts considered are the stance of monetary policy toward inflation, the degree of real wage rigidity, and the degree of autocorrelation of the shock process. The anticipation of regime shifts alters agents' decision rules and feeds back to labor market dynamics.

A NOTE ON BUSINESS-CYCLE PROPERTIES IN FRICTIONAL LABOR MARKETS

This paper builds a standard search model with flexible prices and wages, and extensive and intensive labor adjustments. Money is introduced into the model through a cash-in-advance constraint in which only consumption is cash constrained. The model reproduces labor-market dynamics under a productivity shock and/or a monetary shock. I can replicate the Beveridge and Phillips curves that are observed in the data, and do not need to rely on the New Keynesian model or real wage rigidity. I find that the nonexistence of an extensive margin and different money mechanisms, such as cash constraints on investment and money in the utility function, do not change the above replications. Furthermore, I can still replicate the Beveridge curve even without money or with rigid prices.

CAPITAL DESTRUCTION, JOBLESS RECOVERIES, AND THE DISCIPLINE DEVICE ROLE OF UNEMPLOYMENT

I consider an economy growing along the balanced growth path that is hit by an adverse shock to its capital accumulation process. The model integrates efficiency wages due to imperfect monitoring of the quality of labor in a search and matching framework with methods of dynamic general equilibrium analysis. I show that, depending on the firms' abilities to assess workers' performance, the discipline device role of unemployment may account for sharp declines in employment and jobless recoveries driven by exceptional increases in the work effort of employees. The model also explains why rigid real wages may prevail in equilibrium: the large movements in unemployment are indeed associated with real wage rigidity, which is generated endogenously by efficiency wages.