How important are shocks to the elasticity of aggregate labor supply for business cycle fluctuations? Lessons from Bulgaria

Stochastic shocks to aggregate labor supply elasticity are introduced into a real-business-cycle setup augmented with a detailed government sector. The model is calibrated to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2018). The quantitative importance of a stochastic aggregate labor supply elasticity parameter is investigated for the magnitude of the cyclical fluctuations in Bulgaria. The quantitative effect of such a stochasticity increases the variability of hours, and lowers the correlation between hours and wages, and thus is found to be quantitatively important for the labor market aspect of business cycles.