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Employment and growth in Europe and the US--the role of fiscal policy composition

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Tine Dhont
Freddy Heylen

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Abstract

We construct a simple endogenous growth model to analyse the relationship between the composition of fiscal policy, economic growth and employment. The government sets different tax rates on labour income, capital income, and private consumption to finance productive expenditures, utility-enhancing consumption expenditures, and transfers related to structural non-employment. Our model is able to explain the different employment and growth records of European countries and the US since the 1990s. We use the model to investigate the strength of the effects of various fiscal policy shocks on steady state employment and growth. We also develop the transitional dynamics for many variables, including welfare. Our results highlight the trade-offs that may occur between performance indicators, and between the short and the long-run. Copyright 2009 Oxford University Press 2008 All rights reserved, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oep/gpn034
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Publisher Info
Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 61 (2009)
Issue (Month): 3 (July)
Pages: 538-565
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Handle: RePEc:oup:oxecpp:v:61:y:2009:i:3:p:538-565

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Edward C. Prescott, 2004. "Why do Americans work so much more than Europeans?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Jul, pages 2-13. [Downloadable!]
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  2. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November. [Downloadable!] (restricted)
  3. Patrick Honohan & Brendan Walsh, 2002. "Catching Up with the Leaders: The Irish Hare," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2002-1), pages 1-78. [Downloadable!]
  4. Lindbeck, Assar, 1982. "Tax Effects versus Budget Effects on Labor Supply," Economic Inquiry, Oxford University Press, vol. 20(4), pages 473-89, October.
  5. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February. [Downloadable!] (restricted)
  6. Lorenzo Pozzi, 2003. "Tax Discounting in a High-debt Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(3), pages 261-282, 07. [Downloadable!] (restricted)
  7. Peter Lindert, 2004. "Social Spending and Economic Growth," Challenge, M.E. Sharpe, Inc., vol. 47(4), pages 6-16, July. [Downloadable!] (restricted)
  8. Giuseppe Nicoletti & Stefano Scarpetta, 2005. "Product Market Reforms and Employment in OECD Countries," OECD Economics Department Working Papers 472, OECD, Economics Department. [Downloadable!]
  9. Nicoletti, Giuseppe & Scarpetta, Stefano, 2003. "Regulation, productivity, and growth : OECD evidence," Policy Research Working Paper Series 2944, The World Bank. [Downloadable!]
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  10. Richard B. Freeman & Ronald Schettkat, 2005. "Marketization of household production and the EU-US gap in work," Economic Policy, CEPR, CES, MSH, vol. 20(41), pages 6-50, 01. [Downloadable!] (restricted)
  11. Sjef Ederveen & Henri L.F. Groot & Richard Nahuis, 2006. "Fertile Soil for Structural Funds?A Panel Data Analysis of the Conditional Effectiveness of European Cohesion Policy," Kyklos, Blackwell Publishing, vol. 59(1), pages 17-42, 02. [Downloadable!] (restricted)
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  12. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR, CES, MSH, vol. 17(35), pages 449-495, October. [Downloadable!] (restricted)
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  1. T. Berger & F. Heylen, 2009. "Differences in hours worked in the OECD: institutions or fiscal policies?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/601, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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