Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis

This study presents an overlapping-generations model featuring capital accumu- lation, collective wage-bargaining, and probabilistic voting over fiscal policy. The study characterizes a Markov-perfect political equilibrium of the voting game within and across generations and shows the following results. First, greater bargaining power of unions lowers the growth rate of capital and creates a positive correla- tion between unemployment and public debt. Second, an increase in the political power of the old lowers the growth rate and shifts government expenditure from the unemployed to the old. Third, prohibiting debt finance increases the growth rate and benefits future generations; however, it worsens the current employed and unemployed.