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Fiscal Increasing Returns, Hysteresis, Real Wages and Unemployment


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  • Olivier J. Blanchard
  • Lawrence H. Summers


European unemployment is widely regarded as a problem of excessive real wages. This view as it is usually expressed carries the disturbing implication that there is a sharp conflict between the interests of those currently employed and the unemployed because it suggests that increases in employment will require reductions in the real wages of those currently employed. The first part of this paper shows that increases in employment in Europe are likely to be associated with rising real take-home pay for workers because of fiscal increasing returns. Increases in employment and output will make possible reductions in taxes sufficiently large to offset any effects of diminishing returns to labor. The second part of the paper considers alternative explanations for the failure of nominal wages to adjust so as to restore full employment and their implications for the efficacy of fiscal policies. It concludes that under a variety of plausible conditions tax cuts would succeed in stimulating employment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2034.

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Date of creation: Oct 1986
Date of revision:
Publication status: published as European Economic Review, Vol. 31, No. 3, pp. 543-560, (April 1987).
Handle: RePEc:nbr:nberwo:2034

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