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Labour Market Adjustment, Social Spending and the Automatic Stabilizers in the OECD

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  • Darby, Julia
  • Mélitz, Jacques

Abstract

The macroeconomic literature on automatic stabilization tends to focus on taxes and dismiss the relevance of government expenditure, aside from unemployment compensation. Our results go sharply contrary to this view. We engage in an empirical analysis of 20 OECD countries from 1980-2001 and find that age- and health-related social expenditure as well as incapacity benefits all react to the cycle in a stabilizing manner. While possibly new in the macro literature, this conforms to many results in studies of labour and health. Moreover, when the focus is on the ratio of the net surplus to output, automatic stabilization comes essentially from the spending side. Taxes contribute nothing at all.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6230.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6230

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Keywords: automatic stabilization; cyclically adjusted budget balances; discretionary fiscal policy;

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References

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Citations

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Cited by:
  1. Philippe Aghion & David Hemous & Enisse Kharroubi, 2011. "Cyclical fiscal policy, credit constraints, and industry growth," BIS Working Papers 340, Bank for International Settlements.
  2. Agnello, Luca & Sousa, Ricardo M., 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank.
  3. Simone Bertoli & Francesco Farina, 2007. "The functional distribution of income: a review of the theoretical literature and of the empirical evidence around its recent pattern in European countries," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 005, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  4. Luigi, Bernardi, 2011. "Economic crisis and taxation in Europe," MPRA Paper 31007, University Library of Munich, Germany.

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