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Fiscal policy and the labour market: the effects of public sector employment and wages

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  • Pedro Gomes

Abstract

I build a dynamic stochastic general equilibrium model with search and matching frictions in order to study the labour market effects of public sector employment and wages. Public sector wages are important to achieve the effcient allocation. High wages induce too many unemployed to queue for public sector jobs, raising unemployment. Following technology shocks, public sector wages should be procyclical and deviations from the optimal policy increase the volatility of unemployment significantly. Another conclusion is that different types of fiscal shocks have opposite effects on labour market variables. I then estimate the parameters of the model for the United States

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2011/ecp439_en.htm
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 439.

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Length: 60 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:euf:ecopap:0439

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  1. Postel-Vinay, Fabien & Turon, Hélène, 2005. "The Public Pay Gap in Britain: Small Differences That (Don’t?) Matter," CEPR Discussion Papers 5296, C.E.P.R. Discussion Papers.
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  1. Fiscal Policy and the Labour Market: The Effects of Public Sector Employment and Wages
    by Christian Zimmermann in NEP-DGE blog on 2010-12-30 14:35:19
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