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How harmful are cuts in public employment and wage in times of high unemployment?

Listed author(s):
  • Thomas COUDERT

    ()

    (LaRGE Research Center, Université de Strasbourg)

  • Thierry BETTI

    ()

Since 2010 public employment and public-sector salaries have been significantly reduced in most Euro Area member states. In this article we show to what extent these cuts in the public sector have been costly particularly in terms of employment and output. In a New Keynesian model with a two-sector labor market, we demonstrate that the cost of these spending cuts on employment and output is significantly larger in periods of high unemployment. We also exhibit that cuts in public employment and wage in a Eurozone prone to high unemployment have only a limited ability to reduce deficit.

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File URL: http://ifs.u-strasbg.fr/large/publications/2016/2016-05.pdf
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Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2016-05.

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Date of creation: 2016
Handle: RePEc:lar:wpaper:2016-05
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  1. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
  2. Jean-Olivier Hairault & Francois Langot & Sophie Osotimehin, 2010. "Matching frictions, unemployment dynamics and the cost of business cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 759-779, October.
  3. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," International Finance, Wiley Blackwell, vol. 8(3), pages 435-470, December.
  4. Christoffel, Kai & Kuester, Keith & Linzert, Tobias, 2009. "The role of labor markets for euro area monetary policy," European Economic Review, Elsevier, vol. 53(8), pages 908-936, November.
  5. Pascal Michaillat, 2014. "A Theory of Countercyclical Government Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 190-217, January.
  6. Stähler, Nikolai & Thomas, Carlos, 2012. "FiMod — A DSGE model for fiscal policy simulations," Economic Modelling, Elsevier, vol. 29(2), pages 239-261.
  7. Hairault, Jean-Olivier & Langot, François & Osotimehin, Sophie, 2008. "Unemployment Dynamics and the Cost of Business Cycles," IZA Discussion Papers 3840, Institute for the Study of Labor (IZA).
  8. William B. Peterman, 2016. "Reconciling Micro And Macro Estimates Of The Frisch Labor Supply Elasticity," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 100-120, 01.
  9. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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