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Rolling Back the Public Sector - Differential Effects on Employment, Investment and Growth

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  • Frederick van der Ploeg

Abstract

The 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 Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 890.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_890

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Keywords: welfare state; public employment; labour market; investment; economics growth;

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  1. Holmlund, Bertil, 1997. "Macroeconomic Implications of Cash Limits in the Public Sector," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 64(253), pages 49-62, February.
  2. Frederick VAN DER PLOEG, 2004. "DO SOCIAL POLICIES HARM EMPLOYMENT? Second-best effects of taxes and benefits on labor markets," Economics Working Papers, European University Institute ECO2004/11, European University Institute.
  3. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-57, August.
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  5. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Schiantarelli, Fabio & Perotti, Roberto & Ardagna, Silvia & Alesina, Alberto, 2002. "Fiscal Policy, Profits, and Investment," Scholarly Articles 4685103, Harvard University Department of Economics.
  7. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, Elsevier, vol. 52(1), pages 1-29, August.
  8. Calmfors, Lars & Horn, Henrik, 1986. "Employment Policies and Centralized Wage-Setting," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 53(211), pages 281-302, August.
  9. 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.
  10. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 74(3), pages 433-44, June.
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Cited by:
  1. Frederick van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo Group Munich.
  2. W. Robert Reed, 2006. "The Determinants of U. S. State Economic Growth: A Less Extreme Bounds Analysis," Working Papers in Economics 06/05, University of Canterbury, Department of Economics and Finance.
  3. Giovanni Ganelli, 2005. "The International Effects of Government Spending Composition," IMF Working Papers 05/4, International Monetary Fund.
  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, Elsevier, vol. 93(1-2), pages 176-190, February.

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