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Fiscal Increasing Returns, Hysteresis, Real Wages and Unemployment

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  • Olivier J. Blanchard
  • Lawrence H. Summers

Abstract

European unemployment is widely regarded as a problem of excessive real wages. This view as it is usually expressed carries the disturbing implication that there is a sharp conflict between the interests of those currently employed and the unemployed because it suggests that increases in employment will require reductions in the real wages of those currently employed. The first part of this paper shows that increases in employment in Europe are likely to be associated with rising real take-home pay for workers because of fiscal increasing returns. Increases in employment and output will make possible reductions in taxes sufficiently large to offset any effects of diminishing returns to labor. The second part of the paper considers alternative explanations for the failure of nominal wages to adjust so as to restore full employment and their implications for the efficacy of fiscal policies. It concludes that under a variety of plausible conditions tax cuts would succeed in stimulating employment.

Suggested Citation

  • Olivier J. Blanchard & Lawrence H. Summers, 1986. "Fiscal Increasing Returns, Hysteresis, Real Wages and Unemployment," NBER Working Papers 2034, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2034 Note: EFG
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    1. repec:eee:ecmode:v:64:y:2017:i:c:p:105-116 is not listed on IDEAS
    2. Camarero, Mariam & D'Adamo, Gaetano & Tamarit, Cecilio, 2014. "Wage leadership models: A country-by-country analysis of the EMU," Economic Modelling, Elsevier, vol. 44(S1), pages 2-11.
    3. Raurich, Xavier & Sala, Hector & Sorolla, Valeri, 2006. "Unemployment, Growth, And Fiscal Policy: New Insights On The Hysteresis Hypothesis," Macroeconomic Dynamics, Cambridge University Press, pages 285-316.
    4. Lindbeck, A & Snower, D-J, 1996. "Centralized Bargaining, Multi-Tasking, and Work Incentives," Papers 620, Stockholm - International Economic Studies.
    5. Julie Berry Cullen & Steven D. Levitt, 1999. "Crime, Urban Flight, And The Consequences For Cities," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 159-169, May.
    6. Bozani, Vasiliki & Drydakis, Nick, 2011. "Studying the NAIRU and its Implications," IZA Discussion Papers 6079, Institute for the Study of Labor (IZA).
    7. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2003. "The Survival of the Welfare State," American Economic Review, American Economic Association, vol. 93(1), pages 87-112, March.
    8. Christian Keuschnigg, 2008. "Corporate Taxation and the Welfare State," Working Papers 0813, Oxford University Centre for Business Taxation.
    9. Michael C. Burda & Mark Weder, 2002. "Complementarity of Labor Market Institutions, Equilibrium Unemployment and the Propagation of Business Cycles," German Economic Review, Verein für Socialpolitik, vol. 3(1), pages 1-24, February.
    10. Zhang, J., 1998. "Global behaviour of a system with imperfect private-public substitutability," Journal of Public Economics, Elsevier, vol. 67(3), pages 437-454, March.
    11. Sterk, Vincent, 2016. "The dark corners of the labor market," LSE Research Online Documents on Economics 86244, London School of Economics and Political Science, LSE Library.
    12. Andrea Tafuro, 2015. " The Effects of Fiscal Policy on Employment: an Analysis of the Aggregate Evidence," Working Papers 2015: 03, Department of Economics, University of Venice "Ca' Foscari".
    13. Vincent Sterk, 2015. "The Dark Corners of the Labor Market," 2015 Meeting Papers 798, Society for Economic Dynamics.
    14. Boskin, Michael J., 1988. "Lessons from the United States Economy in the 1980s and their Applicability to Europe," CEPR Publications 244419, Stanford University, Center for Economic Policy Research.
    15. Juan Carlos Cuestas & Javier Ordonez, 2011. "Unemployment and common smooth transition trends in Central and Eastern European Countries," Economic Issues Journal Articles, Economic Issues, vol. 16(2), pages 39-52, September.
    16. Marques, André M. & Lima, Gilberto Tadeu & Troster, Victor, 2017. "Unemployment persistence in OECD countries after the Great Recession," Economic Modelling, Elsevier, vol. 64(C), pages 105-116.
    17. Aurélien Saidi, 2008. "Balanced-Budget Rule, distortionary taxes and Aggregate Instability: A Comment," EconomiX Working Papers 2008-44, University of Paris Nanterre, EconomiX.
    18. Saint Paul, Gilles & Verdier, Thierry, 1997. "Power, Distributive Conflicts, and Multiple Growth Paths," Journal of Economic Growth, Springer, vol. 2(2), pages 155-168, July.
    19. Ludger Linnemann, 2004. "Tax Base and Crowding-in Effects of Balanced Budget Fiscal Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 273-297, June.
    20. Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    21. Den Haan, Wouter J., 2003. "Temporary shocks and unavoidable transitions to a high-unemployment regime," Working Paper Series 239, European Central Bank.
    22. Ortigueira, Salvador, 2006. "Skills, search and the persistence of high unemployment," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2165-2178, November.
    23. I. Agur, 2003. "Trade-volume hysteresis: an investigation using aggregate data," WO Research Memoranda (discontinued) 740, Netherlands Central Bank, Research Department.

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