Working Paper: NBER ID: w7515
Authors: Craig Burnside; Martin Eichenbaum; Jonas Fisher
Abstract: This paper analyzes the ability of a general equilibrium efficiency wage model to account for the estimated response of hours worked and of real wages to a fiscal policy shock. Our key finding is that the model cannot do so unless we make the counterfactual assumption that marginal tax rates are constant. The model shares the strengths and weaknesses of high labor supply elasticity Real Business Cycle models. In particular it can account for the conditional volatility of real wages and hours worked. But it cannot account for the temporal pattern of how these variables respond to a fiscal policy shock and generates a counterfactual negative conditional correlation between government purchases and hours worked.
Keywords: Fiscal policy; Efficiency wage model; General equilibrium; Labor supply elasticity
JEL Codes: E62; E9
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy shock (E62) | hours worked (J22) |
| Fiscal policy shock (E62) | real wages (J31) |
| Government purchases (H59) | hours worked (J22) |
| Government purchases (H59) | real wages (J31) |
| hours worked (J22) | real wages (J31) |
| Constant marginal tax rates (H29) | hours worked (J22) |
| Constant marginal tax rates (H29) | real wages (J31) |
| High labor supply elasticity RBC models (J49) | negative conditional correlation between government purchases and hours worked (J22) |
| High labor supply elasticity RBC models (J49) | temporal patterns of hours worked and real wages responses to fiscal policy shocks (H31) |