A numerical approach to fiscal policy, unemployment and growth in Europe
AbstractEurope is faced with serious problems of slow growth and little employment creation. Are the two problems related at all? Our proposed answer is: yes, they are. Building on Daveri and Tabellini (1997), we developed an infinite-horizon model with endogenous growth due to learning-by-doing and unemployment due to monopoly union bargaining in the labor market. In this framework, high labor and capital taxes and unemployment subsidies may in principle reduce employment and growth.The model is then calibrated using actual data from a variety of countries in Continental Europe, which we identify as the closest to our toy model.We run two types of balanced-budget fiscal policy experiments, focusing on their employment and growth effects .First, we separately change tax rates on capital, labor and subsidies, as well as replacement rates, while assuming that the government budget is kept balanced by appropriate changes in lump-sum trasnfers. Second, we cut labor taxes and adjust capital taxes in order to keep the GDP share of lump-sum transfers unchanged. Our numerical results suggest that, in the absence of binding revenue constraints, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while capital taxes are less useful. f revenue constraints are binding, instead, cutting labor taxes is in general ineffective in boosting employment and growth.
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Bibliographic InfoPaper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 155.
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- Francesco Daveri & Marco Maffezzoli, 2000. "A numerical approach to fiscal policy, unemployment, and growth in Europe," Macroeconomics 0004010, EconWPA.
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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