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Fiscal Policy in Unionized Labor Markets

  • Ardagna, Silvia
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    This paper investigates the effects of fiscal policy on economic activity, public finances, welfare, and income distribution in a dynamic general equilibrium model with a unionized labor market. The paper shows that debt-financed increases of public employment, wages of public sector employees, unemployment benefits, and labor taxes put pressure on unions’ wage claims, leading to higher private sector wages, lower employment, capital, and output. In addition, increases of public employment, public wages and unemployment benefits increase workers’ utility relative to the pre-policy change equilibrium during the transition, but not in the long-run. Instead, workers’ utility decreases at any time horizon when labor taxes increase. Capitalists always benefit from increases in taxes on labor but their welfare decreases when public spending goes up. Finally, the paper investigates the extent to which the way the government balances its budget affects these results.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/2580048/Ardagna_FiscalPolicy.pdf
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    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2580048.

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    Date of creation: 2007
    Date of revision:
    Publication status: Published in Journal of Economic Dynamics and Control
    Handle: RePEc:hrv:faseco:2580048
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    Web page: http://www.economics.harvard.edu/

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    7. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.
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    9. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
    10. Johannes Horner & L. Rachel Ngai & Claudia Olivetti, 2004. "Public enterprises and labor market performance," LSE Research Online Documents on Economics 3529, London School of Economics and Political Science, LSE Library.
    11. Francesco Zanetti, 2003. "Non-Walrasian Labor Market and the European Business Cycle," Boston College Working Papers in Economics 574, Boston College Department of Economics, revised 20 May 2004.
    12. Ardagna, Silvia, 2004. "Fiscal stabilizations: When do they work and why," European Economic Review, Elsevier, vol. 48(5), pages 1047-1074, October.
    13. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    14. Ohanian, Lee E, 1997. "The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War," American Economic Review, American Economic Association, vol. 87(1), pages 23-40, March.
    15. Francesco Giavazzi & Tullio Jappelli & Marco Pagano, 2000. "Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries," NBER Working Papers 7460, National Bureau of Economic Research, Inc.
    16. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
    17. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December.
    18. Jim Malley & Thomas Moutos, 1992. "Does Government Employment "Crowd-Out" Private Employment?: Evidence from Sweden," Working Papers Series 92/16, University of Stirling, Division of Economics.
    19. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    20. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
    21. Francesco Daveri & Marco Maffezzoli, . "A numerical approach to fiscal policy, unemployment and growth in Europe," Working Papers 155, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    22. Dotsey, Michael, 1994. "Some unpleasant supply side arithmetic," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 507-524, June.
    23. Lorenzo Forni & Raffaela Giordano, 2003. "Employment in the Public Sector," CESifo Working Paper Series 1085, CESifo Group Munich.
    24. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
    25. C. John McDermott & Robert F. Wescott, 1996. "An Empirical Analysis of Fiscal Adjustments," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 725-753, December.
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    27. Jantti, Markus, 1997. "Inequality in Five Countries in the 1980s: The Role of Demographic Shifts, Markets and Government Policies," Economica, London School of Economics and Political Science, vol. 64(255), pages 415-40, August.
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