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The Government Wage Bill and Private Activity

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  • Dimitrios Bermperoglou
  • Evi Pappa
  • Eugenia Vella

Abstract

We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. Aggregate public wage bill shocks induce typically insignifi?cant effects. Disaggregating by government level reveals that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private-sector employment.Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce signifi?cant contractionary effects.In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity.

Suggested Citation

  • Dimitrios Bermperoglou & Evi Pappa & Eugenia Vella, 2016. "The Government Wage Bill and Private Activity," Cahiers de Recherches Economiques du Département d'économie 16.24, Université de Lausanne, Faculté des HEC, Département d’économie.
  • Handle: RePEc:lau:crdeep:16.24
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    2. Gerald A. Carlino & Thorsten Drautzburg & Robert P. Inman, 2020. "Partisanship and Fiscal Policy in Economic Unions: Evidence from U.S. States," Working Papers 20-20, Federal Reserve Bank of Philadelphia.
    3. Juin-Jen Chang & Hsieh-Yu Lin & Nora Traum & Shu-Chun Susan Yang, 2019. "Fiscal Consolidation and Public Wages," IMF Working Papers 2019/125, International Monetary Fund.
    4. Cardi, Olivier & Restout, Romain & Claeys, Peter, 2020. "Imperfect mobility of labor across sectors and fiscal transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    5. Guilherme Bandeira & Evi Pappa & Rana Sajedi & Eugenia Vella, 2018. "Fiscal Consolidation in a Low-Inflation Environment: Pay Cuts versus Lost Jobs," International Journal of Central Banking, International Journal of Central Banking, vol. 14(3), pages 7-52, June.
    6. Moro, Alessio & Rachedi, Omar, 2018. "The Changing Structure of Government Spending," MPRA Paper 86577, University Library of Munich, Germany.
    7. Guilherme Bandeira & Jordi Caballe & Eugenia Vella, 2019. "Fiscal Austerity and Migration: A Missing Link," Working Papers 2019009, The University of Sheffield, Department of Economics.
    8. Christian Bredemeier & Falko Juessen & Roland Winkler, 2020. "Fiscal Policy and Occupational Employment Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1527-1563, September.
    9. Gerald Carlino & Nicholas Zarra & Robert Inman & Thorsten Drautzburg, 2019. "Fiscal Policy in Monetary Unions: State Partisanship and its Macroeconomic Effects," 2019 Meeting Papers 434, Society for Economic Dynamics.
    10. Alessio Moro & Omar Rachedi, 2018. "The changing structure of goverment consumption spending," Working Papers 1840, Banco de España;Working Papers Homepage.
    11. Nalban, Valeriu & Smădu, Andra, 2021. "The interaction between private sector and public sector labor markets: Evidence from Romania," Economic Modelling, Elsevier, vol. 94(C), pages 804-821.
    12. Dioikitopoulos, Evangelos V., 2018. "Dynamic adjustment of fiscal policy under a debt crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 260-276.

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    More about this item

    Keywords

    Matching; government wage bill; fiscal multipliers; VARs; sign restrictions; DSGE model; search and matching frictions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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