Fiscal Consolidation and Public Wages

Author/Editor:

Juin-Jen Chang ; Hsieh-Yu Lin ; Nora Traum ; Shu-Chun Susan Yang

Publication Date:

June 10, 2019

Electronic Access:

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Summary:

A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the macroeconomic and fiscal effects of public wage reductions. We find that accounting for the type of government spending is crucial for its macroeconomic implications. Although reductions in public wages and government purchases of goods have similar effects on total output and the fiscal balance, the former can raise private output slightly, in contrast to the substantial contractionary effects of the latter. In addition, the baseline estimation finds that exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the response of private wages, as the rigidity dampens the labor reallocation effect from the public to private sector that exerts downward pressure on private wages.

Series:

Working Paper No. 19/125

Subject:

English

Publication Date:

June 10, 2019

ISBN/ISSN:

9781498316835/1018-5941

Stock No:

WPIEA2019125

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

52

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