IDEAS home Printed from https://ideas.repec.org/a/oup/oxecpp/v58y2006i1p103-122.html
   My bibliography  Save this article

Rolling back the public sector: differential effects on employment, investment, and growth

Author

Listed:
  • Frederick van der Ploeg

Abstract

The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock, and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment, and non-Walrasian labour markets on these results are considered as well. Copyright 2006, Oxford University Press.

Suggested Citation

  • Frederick van der Ploeg, 2006. "Rolling back the public sector: differential effects on employment, investment, and growth," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 103-122, January.
    • Handle: RePEc:oup:oxecpp:v:58:y:2006:i:1:p:103-122
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/oep/gpi042
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
    2. Calmfors, Lars & Horn, Henrik, 1986. "Employment Policies and Centralized Wage-Setting," Economica, London School of Economics and Political Science, vol. 53(211), pages 281-302, August.
    3. Frederick VAN DER PLOEG, 2004. "DO SOCIAL POLICIES HARM EMPLOYMENT? Second-best effects of taxes and benefits on labor markets," Economics Working Papers ECO2004/11, European University Institute.
    4. Bertil Holmlund, 1997. "Macroeconomic Implications of Cash Limits in the Public Sector," Economica, London School of Economics and Political Science, vol. 64(253), pages 49-62, February.
    5. Pappa, Evi, 2005. "New-keynesian or RBC transmission? The effects of fiscal shocks in labour markets," LSE Research Online Documents on Economics 524, London School of Economics and Political Science, LSE Library.
    6. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-657, August.
    7. Atkinson, Anthony B & Micklewright, John, 1991. "Unemployment Compensation and Labor Market Transitions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1679-1727, December.
    8. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    9. repec:hrv:faseco:3353756 is not listed on IDEAS
    10. Evi Pappa, 2005. "New Keynesian or RBC Transmission? The Effects of Fiscal Policy in Labor Markets," Working Papers 293, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    11. Ben Lockwood & Alan Manning, 1993. "Wage Setting and the Tax System: theory and Evidence for the UK," CEP Discussion Papers dp0115, Centre for Economic Performance, LSE.
    12. Ardagna, Silvia, 2001. "Fiscal Policy Composition, Public Debt, and Economic Activity," Scholarly Articles 2579823, Harvard University Department of Economics.
    13. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
    14. Ardagna, Silvia, 2001. "Fiscal Policy Composition, Public Debt, and Economic Activity," Public Choice, Springer, vol. 109(3-4), pages 301-325, December.
    15. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. W. Robert Reed, 2009. "The Determinants Of U.S. State Economic Growth: A Less Extreme Bounds Analysis," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 685-700, October.
    2. Frederick Van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo.
    3. Ganelli, Giovanni, 2010. "The international effects of government spending composition," Economic Modelling, Elsevier, vol. 27(3), pages 631-640, May.
    4. Petrucci, Alberto & Phelps, Edmund S., 2009. "Two-sector perspectives on the effects of payroll tax cuts and their financing," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 176-190, February.
    5. Mai Dao, 2008. "International Spillover of Labor Market Reforms," IMF Working Papers 2008/113, International Monetary Fund.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.
    2. Frederick Van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo.
    3. Gonzalo Fernández-de-Córdoba & Javier Pérez & José Torres, 2012. "Public and private sector wages interactions in a general equilibrium model," Public Choice, Springer, vol. 150(1), pages 309-326, January.
    4. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
    5. K. Peren Arin & Faik Koray, 2005. "Fiscal Policy And Economic Activity: Us Evidence," CAMA Working Papers 2005-09, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
    7. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
    8. Frederick Van der Ploeg, 2004. "The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best," CESifo Working Paper Series 1234, CESifo.
    9. Kasselaki, Maria Th. & Tagkalakis, Athanasios O., 2016. "Fiscal policy and private investment in Greece," International Economics, Elsevier, vol. 147(C), pages 53-106.
    10. Kory Kroft & Kavan Kucko & Etienne Lehmann & Johannes Schmieder, 2020. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 254-292, February.
    11. Marzinotto, Benedicta & Turrini, Alessandro, 2016. "Co-movements between Public and Private Wages in the EU: Which Factors Play a Role?," IZA Discussion Papers 9964, Institute of Labor Economics (IZA).
    12. Athanasios Tagkalakis, 2006. "The effects of macroeconomic policy shocks on the UK labour market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 229-244.
    13. John Hutton & Anna Ruocco, 1999. "Tax Reform and Employment in Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 263-287, August.
    14. Pappa, Evi, 2005. "New-Keynesian or RBC Transmission? The Effects of Fiscal Shocks in Labour Markets," CEPR Discussion Papers 5313, C.E.P.R. Discussion Papers.
    15. Alper, C. Emre & Ardic, Oya Pinar & Mumcu, Ayse & Saglam, Ismail, 2008. "The welfare effects of government's preferences over spending and its financing," Economic Modelling, Elsevier, vol. 25(1), pages 1-12, January.
    16. Lans Bovenberg, 2003. "Tax Policy and Labor Market Performance," CESifo Working Paper Series 1035, CESifo.
    17. Knut Røed & Steinar Strøm, 2002. "Progressive Taxes and the Labour Market: Is the Trade–off Between Equality and Efficiency Inevitable?," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 77-110, February.
    18. Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2013. "Are government wages interlinked with private sector wages?," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 697-712.
    19. van Ewijk, Casper & Tang, Paul J.G., 2007. "Unions, progressive taxes, and education subsidies," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1119-1139, December.
    20. Hutton, John P. & Ruocco, Anna, 1998. "Tax reform and employment in Europe," Tübinger Diskussionsbeiträge 144, University of Tübingen, School of Business and Economics.

    More about this item

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:oxecpp:v:58:y:2006:i:1:p:103-122. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/oep .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.