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Rolling back the public sector: differential effects on employment, investment, and growth

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  • Frederick van der Ploeg

Abstract

The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock, and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment, and non-Walrasian labour markets on these results are considered as well. Copyright 2006, Oxford University Press.

Suggested Citation

  • Frederick van der Ploeg, 2006. "Rolling back the public sector: differential effects on employment, investment, and growth," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 103-122, January.
  • Handle: RePEc:oup:oxecpp:v:58:y:2006:i:1:p:103-122
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    File URL: http://hdl.handle.net/10.1093/oep/gpi042
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    References listed on IDEAS

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    Cited by:

    1. Ganelli, Giovanni, 2010. "The international effects of government spending composition," Economic Modelling, Elsevier, vol. 27(3), pages 631-640, May.
    2. Frederick Van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo Group Munich.
    3. Petrucci, Alberto & Phelps, Edmund S., 2009. "Two-sector perspectives on the effects of payroll tax cuts and their financing," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 176-190, February.
    4. W. Robert Reed, 2009. "The Determinants Of U.S. State Economic Growth: A Less Extreme Bounds Analysis," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 685-700, October.
    5. Mai Dao, 2008. "International Spillover of Labor Market Reforms," IMF Working Papers 08/113, International Monetary Fund.

    More about this item

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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