Working Paper: CEPR ID: DP7728
Authors: Tommaso Monacelli; Roberto Perotti; Antonella Trigari
Abstract: We estimate the effects of fiscal policy on the labor market in US data. An increase in government spending of 1 percent of GDP generates output and unemployment multipliers respectively of about 1.2 per cent (at one year) and 0.6 percentage points (at the peak). Each percentage point increase in GDP produces an increase in employment of about 1.3 million jobs. Total hours, employment and the job finding probability all rise, whereas the separation rate falls. A standard neoclassical model augmented with search and matching frictions in the labor market largely fails in reproducing the size of the output multiplier whereas it can produce a realistic unemployment multiplier but only under a special parameterization. Extending the model to strengthen the complementarity in preferences, to include unemployment benefits, real wage rigidity and/or debt financing with distortionary taxation only worsens the picture. New Keynesian features only marginally magnify the size of the multipliers. When complementarity is coupled with price stickiness, however, the magnification effect can be large.
Keywords: fiscal policy; labor market; unemployment
JEL Codes: D91; E21; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government Spending (H59) | GDP (E20) |
| Government Spending (H59) | Unemployment (J64) |
| GDP (E20) | Jobs Created (J23) |
| Government Spending (H59) | Total Hours Worked (J22) |
| Government Spending (H59) | Job Finding Probability (J68) |
| Government Spending (H59) | Separation Rate (J63) |
| Government Spending (H59) | Real Wage (J31) |
| Government Spending (H59) | Markup (Y60) |