The effects of fiscal shocks on employment and the real wage Articles uri icon

publication date

  • January 2009

issue

  • 1

volume

  • 50

International Standard Serial Number (ISSN)

  • 0020-6598

Electronic International Standard Serial Number (EISSN)

  • 1468-2354

abstract

  • We study the transmission of fiscal shocks in the labor market. We employ a structural VAR and base identification on the restrictions that shocks to government consumption, investment, and employment must raise output and deficits. These restrictions hold in both prototype Real Business Cycle (RBC) and New Keynesian models. Shocks to government consumption and investment increase real wages and employment contemporaneously, both at state level and in the aggregate. The dynamics in response to employment shocks are mixed: Increases in government employment raise the real wage and total employment in the aggregate. However, in one third of the states they reduce total employment. (copyright) (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.