Essays on real business cycle modeling and the public sector

HB Economic Theory;HJ Public Finance

Vasilev, Aleksandar Zdravkov ; Malley, James

University:University of Glasgow

Department:Adam Smith Business School

关键词: Real-business-cycle model, fiscal policy, public wages, public employment, labor market,public sector labor unions, optimal policy, government spending, rent-seeking, bureaucracy;   

Others  :  http://theses.gla.ac.uk/4286/1/2013Vasilevphd.pdf

来源: University of Glasgow

【 摘 要 】

This thesis is composed of three core chapters on modern dynamic macroeconomics, whichstudy different aspects of the public sector labor market in a large EU economy with significant public employment share and a non-trivial public sector wage premium over theprivate sector labor compensation. The study in this dissertation adds to earlier research byincorporating endogenous government hours and wages in the model framework and arguesthat the presence of a sizable public sector labor market in European economies generatessignificant interaction with the private sector labor and capital markets. In addition, thepresence of interest groups (labor unions, government bureaucracy), as well as other labormarket frictions in the public sector, is shown to be an important element of the analysiswhen discussing fiscal policy reforms.Motivated by the highly-unionized public sectors, the high public shares in total employment,and the public sector wage premia observed in most post-WWII European economies,Chapter 1 examines the role of public sector unions in a general equilibrium framework. Astrong union presence in a large non-market sector is shown to be relevant for both businesscycle fluctuations and for the welfare effect of fiscal regime changes. To this end,an otherwise standard real-business-cycle (RBC) model is augmented with a public sectorunion optimization problem. The resulting theoretical setup generates cyclical behavior ingovernment hours and wages that is consistent with data behavior in an economy with a highly-unionized public sector, namely Germany during the period 1970-2007. The mainfindings of Chapter 1 are: (i) the model with a public sector union performs reasonably wellvis-a-vis data; (ii) overall, the public sector union model is a significant improvement over asimilar model with exogenous public sector employment; (iii) endogenously-determined publicwage and hours add to the distortionary effect of contractionary tax reforms and producesignificantly higher welfare losses. Additionally, the union model requires greater changesin tax rates to achieve a pre-specified increase in tax revenue compared to an equivalentmodel with exogenous public sector hours. Thus, endogenous public sector hours and wagesin the setup are shown to be quantitatively important for public policy evaluation. Ignoringthe positive co-movement between public and private hours and wages leads to a significantunderestimation of the welfare effect of fiscal regime changes.Chapter 2 characterizes optimal fiscal policy and evaluates it relative to the exogenous (observed)one. Motivated by the high public employment, and the public wage premia observedin the major European economies, a Real-Business-Cycle model, calibrated to German data(1970-2007), is set up with a richer government spending side, and an endogenous private-publicsector labor choice. To illustrate the effects of fiscal policy on sectoral allocation ofhours, public wage rate determination and the provision of labor-intensive public services,two regimes are compared and contrasted to one another - exogenous vs. optimal (Ramsey)policy case. The main findings from the computational experiments performed in Chapter 2are: (i) The optimal steady-state capital tax rate is zero, as it is the most distortionary taxto use; (ii) A higher labor tax rate is needed in the Ramsey case to compensate for the lossin capital tax revenue; (iii) Under the optimal policy regime, public sector employment islower, but government employees receive higher wages; (iv) The benevolent Ramsey plannerprovides the optimal amount of the public good, and substitutes labor for capital in theinput mix for public services and private output; (v) The government wage bill is smaller,while public investment is three times higher than in the exogenous policy case.Lastly, the thesis tries to delve into the hierarchical structure of public employment serviceand addresses the problem of rent-seeking in the public sector by government bureaucrats.Chapter 3 studies the wasteful effect of bureaucracy on the economy by addressing the linkbetween rent-seeking behavior of government bureaucrats and the public sector wage bill,which is taken to represent the rent component. In particular, public officials are modeled asindividuals competing for a larger share of those public funds. The theoretical model usedis calibrated to German data for the period 1970-2007. The analysis then extends to theother major EU economies as well. To illustrate the effects of fiscal policy on rent-seeking,the exogenous and the optimal (Ramsey) policy cases are compared and contrasted to oneanother. The main findings of Chapter 3 are: (i) Due to the existence of a signicant publicsector wage premium and the large public sector employment, a substantial amount of workingtime is spent rent-seeking, which in turn leads to significant losses measured in termsof aggregate output; (ii) The measures for the rent-seeking cost obtained from the modelfor the major EU countries are highly-correlated to indices of bureaucratic ineficiency; (iii)Under the optimal fiscal policy regime, steady-state rent-seeking is smaller relative to theexogenous policy case. The benevolent government invests more in public capital, sets ahigher public wage premium, but chooses much lower public employment, thus achieving adecrease in rent-seeking.