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Labour Share Heterogeneity and Fiscal Consolidation Programs

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  • Freitas, Bruno

Abstract

We show that the labour share of income is an important factor affecting the mechanisms behind fiscal consolidation programs, thus requiring consideration when evaluating fiscal multipliers across countries. We calibrate a life-cycle, overlapping generations model to match key characteristics of different European economies and evaluate the recessive impacts of fiscal consolidation programs. We find a positive relationship between the labour share and the impact fiscal multipliers generated by our model. This result directly follows from the higher weight of labour on production and the lower opportunity cost of leisure present in economies with a higher labour share. Following the impact period, the relationship between the labour share and the fiscal multipliers is dependent on the type of fiscal instrument employed in the consolidation.

Suggested Citation

  • Freitas, Bruno, 2020. "Labour Share Heterogeneity and Fiscal Consolidation Programs," MPRA Paper 98973, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:98973
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Consolidation; Labour Share; Fiscal Multipliers; Public Debt;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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