Rolling Back the Public Sector - Differential Effects on Employment, Investment and Growth
AbstractThe macroeconomic effects on growth, investment and private sector employment of different ways of rolling back the welfare state are analysed. Cutting public spending on private goods induces a lower interest rate, a higher wage, a lower capital stock and a fall in employment. Cutting public employment or the 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 income tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on private goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment and non-competitive labour markets are considered as well
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 890.
Date of creation: 2003
Date of revision:
welfare state; public employment; labour market; investment; economics growth;
Other versions of this item:
- 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.
- van der Ploeg, Frederick, 2005. "Rolling Back the Public Sector - Differential Effects on Unemployment, Investment and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4896, C.E.P.R. Discussion Papers.
- D90 - Microeconomics - - Intertemporal Choice - - - 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-05-02 (All new papers)
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