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Public Spending, Market Imperfections, and Unemployment

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  • Donatella Gatti

    (CEPREMAP, 142 Rue de Chevaleret, CEPREMAP, PSE Paris Jourdan Sciences Economique, Paris 75013, France. E-mails: gatti@pse.ens.fr, gatti@univ-paris13.fr)

Abstract

This paper proposes a generalized wage-setting/price-setting model studying the impact of public spending on employment, in the presence of imperfect competition in labor and product markets. Public spending is shown to affect firms’ profit margins and firms’ labor demand schedules. The model highlights a new channel by which fiscal policy can improve employment. By reducing firms’ mark-up, public spending helps countering the adverse effects of market power in imperfectly competitive goods markets.

Suggested Citation

  • Donatella Gatti, 2009. "Public Spending, Market Imperfections, and Unemployment," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 35(4), pages 452-461.
    • Handle: RePEc:pal:easeco:v:35:y:2009:i:4:p:452-461
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    Cited by:

    1. Saeid Mahdavi & Emmanuel Alanis, 2013. "Public expenditures and the unemployment rate in the American states: panel evidence," Applied Economics, Taylor & Francis Journals, vol. 45(20), pages 2926-2937, July.

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