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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 on growth, investment and private sector employment of different ways of rolling back the welfare state are analysed. Cutting public spending on private goods induces a lower interest rate, a higher wage, a lower capital stock and a fall in employment. Cutting public employment or the 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 income tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on private goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment and non-competitive labour markets are considered as well

Suggested Citation

  • Frederick Van der Ploeg, 2003. "Rolling Back the Public Sector - Differential Effects on Employment, Investment and Growth," CESifo Working Paper Series 890, CESifo.
    • Handle: RePEc:ces:ceswps:_890
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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. Mai Dao, 2008. "International Spillover of Labor Market Reforms," IMF Working Papers 2008/113, International Monetary Fund.
    3. 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.
    4. Frederick Van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo.
    5. 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.

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    More about this item

    Keywords

    welfare state; public employment; labour market; investment; economics growth;
    All these keywords.

    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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