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Fiscal tightening and skills mismatch

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  • Mavrigiannakis, Konstantinos
  • Vasilatos, Andreas
  • Vella, Eugenia

Abstract

The paper establishes a new link between fiscal tightening and the vertical skills mismatch rate, defined as the share of over-qualified workers. Using cross-country evidence for Europe, we show that fiscal tightening can increase skills mismatch. We then introduce the latter in a DSGE model with heterogeneous households, capital-skill complementarity (CSC) and labor frictions. We calibrate the model for Greece, where the over-qualification rate exceeds one-third. A fiscal tightening shock raises the mismatch rate in the model, in line also with SVAR analysis. Skills mismatch can act as a buffer for high-skilled workers during recessions induced by tax shocks and is more counter-cyclical when CSC is weak. We also use the model to conduct welfare and policy analyses.

Suggested Citation

  • Mavrigiannakis, Konstantinos & Vasilatos, Andreas & Vella, Eugenia, 2025. "Fiscal tightening and skills mismatch," European Economic Review, Elsevier, vol. 174(C).
    • Handle: RePEc:eee:eecrev:v:174:y:2025:i:c:s0014292125000340
    DOI: 10.1016/j.euroecorev.2025.104984
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    Keywords

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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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