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Labor Share Heterogeneity and Fiscal Consolidation Programs

Author

Listed:
  • Pedro Brinca

    (Nova School of Business and Economics (SBE))

  • Bruno Freitas

    (Nova School of Business and Economics (SBE))

  • Margarida Isabel Mano Tavares Simões Lopes Marques Almeida

    (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra)

Abstract

We show that the labor share of income is an important factor affecting the mechanisms behind fiscal consolidation programs, thus requiring consideration when evaluating fiscal multipliers across countries. We calibrate a life-cycle, overlapping generations model to match key characteristics of different European economies and evaluate the recessive impacts of fiscal consolidation programs. We find a positive relationship between the labor share and the impact fiscal multipliers generated by our model. This result directly follows from the higher weight of labor on production and the lower opportunity cost of leisure present in economies with a higher labor share. Following the impact period, the relationship between the labor share and the fiscal multipliers is dependent on the type of fiscal instrument employed in the consolidation.

Suggested Citation

  • Pedro Brinca & Bruno Freitas & Margarida Isabel Mano Tavares Simões Lopes Marques Almeida, 2020. "Labor Share Heterogeneity and Fiscal Consolidation Programs," CeBER Working Papers 2020-04, Centre for Business and Economics Research (CeBER), University of Coimbra.
  • Handle: RePEc:gmf:papers:2020-04
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    File URL: https://www.uc.pt/en/uid/ceber/working-paper?key=e3cfc834
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    More about this item

    Keywords

    Fiscal Consolidation; Labor Share; Fiscal Multipliers; Public Debt.;

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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