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Fiscal policy and the labour market: the effects of public sector employment and wages

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  • Pedro Gomes

Abstract

I build a dynamic stochastic general equilibrium model with search and matching frictions in order to study the labour market effects of public sector employment and wages. Public sector wages are important to achieve the effcient allocation. High wages induce too many unemployed to queue for public sector jobs, raising unemployment. Following technology shocks, public sector wages should be procyclical and deviations from the optimal policy increase the volatility of unemployment significantly. Another conclusion is that different types of fiscal shocks have opposite effects on labour market variables. I then estimate the parameters of the model for the United States

Suggested Citation

  • Pedro Gomes, 2011. "Fiscal policy and the labour market: the effects of public sector employment and wages," European Economy - Economic Papers 2008 - 2015 439, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecopap:0439
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    References listed on IDEAS

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    1. Fabien Postel-Vinay & Hélène Turon, 2007. "The Public Pay Gap in Britain: Small Differences That (Don't?) Matter," Economic Journal, Royal Economic Society, vol. 117(523), pages 1460-1503, October.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Fiscal Policy and the Labour Market: The Effects of Public Sector Employment and Wages
      by Christian Zimmermann in NEP-DGE blog on 2010-12-30 20:35:19

    Citations

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    Cited by:

    1. Valerie A. Ramey, 2012. "Government Spending and Private Activity," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 19-55, National Bureau of Economic Research, Inc.
    2. Afonso, António & Gomes, Pedro, 2014. "Interactions between private and public sector wages," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 97-112.
    3. F. Di Pace & K. Mitra & S. Zhang, 2021. "Adaptive Learning and Labor Market Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 441-475, March.
    4. Blomquist, Johan & Nordin, Martin, 2017. "Do the CAP subsidies increase employment in Sweden? estimating the effects of government transfers using an exogenous change in the CAP," Regional Science and Urban Economics, Elsevier, vol. 63(C), pages 13-24.
    5. Monacelli, Tommaso & Perotti, Roberto & Trigari, Antonella, 2010. "Unemployment fiscal multipliers," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 531-553, July.
    6. Vasilev, Aleksandar, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," EconStor Preprints 142338, ZBW - Leibniz Information Centre for Economics.
    7. Henrique S. Basso & James Costain, 2016. "Fiscal Delegation in a Monetary Union with Decentralized Public Spending," CESifo Economic Studies, CESifo Group, vol. 62(2), pages 256-288.
    8. Steinar Holden & Victoria Sparrman, 2018. "Do Government Purchases Affect Unemployment?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(1), pages 124-158, January.
    9. Totzek, Alexander & Winkler, Roland C., 2010. "Fiscal stimulus in model with endogenous firm entry," MPRA Paper 26829, University Library of Munich, Germany, revised Nov 2010.
    10. Henrique S. Basso & James Costain, 2017. "Fiscal delegation in a monetary union: instrument assignment and stabilization properties," Working Papers 1710, Banco de España.
    11. T. Buyse & F. Heylen, 2012. "Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/826, Ghent University, Faculty of Economics and Business Administration.
    12. Ekkehard Ernst & Uma Rani, 2011. "Understanding unemployment flows," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 27(2), pages 268-294.
    13. Gonzalo Fernández-de-Córdoba & Javier Pérez & José Torres, 2012. "Public and private sector wages interactions in a general equilibrium model," Public Choice, Springer, vol. 150(1), pages 309-326, January.
    14. Pascal Jacquinot & Matija Lozej & Massimiliano Pisani, 2018. "Labor Tax Reforms, Cross-Country Coordination, and the Monetary Policy Stance in the Euro Area: A Structural Model-Based Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 14(3), pages 65-140, June.
    15. Beatriz de Blas & James Costain, 2012. "Smoothing shocks and balancing budgets in a currency union^M," 2012 Meeting Papers 975, Society for Economic Dynamics.
    16. Michaillat, Pascal, 2011. "Fiscal Multipliers Over the Business Cycle," CEPR Discussion Papers 8610, C.E.P.R. Discussion Papers.
    17. Munkacsi, Zsuzsa, 2015. "Fiscal austerity, unemployment and family firms," Discussion Papers 06/2015, Deutsche Bundesbank.
    18. Michaillat, Pascal, 2012. "A theory of countercyclical government-consumption multiplier," LSE Research Online Documents on Economics 54277, London School of Economics and Political Science, LSE Library.
    19. Blomquist , Johan & Nordin, Martin, 2013. "Do the CAP Subsidies Increase Employment in Sweden? Estimating the Open Economy Relative Multiplier Using an Exogenous Change in the CAP," Working Papers 2013:41, Lund University, Department of Economics.
    20. Francesca D'Auria & Jesus Maria Irigoyen & Josefa Monteagudo & Plamen Nikolov & Alexander Rutkowski & Michael Sket & Ann-Louise Winther, . "Quarterly Report on the Euro Area (QREA), Vol.11, No.2 (2012)," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    21. Burgert, Matthias & Gomes, Pedro, 2011. "The Effects of Government Spending: A Disaggregated Approach," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48690, Verein für Socialpolitik / German Economic Association.
    22. Vasilev, Aleksandar, 2013. "Essays on Real Business Cycle Modeling and the Public Sector," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 130522, July.
    23. Costain, James & de Blas, Beatriz, 2012. "The role of fiscal delegation in a monetary union: a survey of the political economy issues," Working Papers in Economic Theory 2012/11, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
    24. Gaetano Lisi, 2023. "Tax Audits, Tax Rewards and Labour Market Outcomes," Economies, MDPI, vol. 11(2), pages 1-12, February.
    25. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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