Fiscal Consolidation and Public Wages

Abstract

Fiscal Consolidation and Public Wages A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the effects of public wage reductions. Estimation implies reductions in public wages and government goods purchases have similar effects on total output, and the fiscal balance, yet the former can raise private output slightly, while the latter does not. Exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the private wage response, as the rigidity dampens the labor reallocation effect from the public to private sector that exerts downward pressure on private wages.

Credit Guarantee and Fiscal Costs

“…We calibrate this parameter to China using the employment data at industry level from the China's National Bureau of Statistics as well as corresponding wage data from the Ministry of Labor and Social Security for the period of 2010-20. 4 The calibration is within the estimate range in the literature of 1.0 from Horvath (2000) and 1.5 from Chang et al (2021) albeit different data sets we use.…”

“…The depreciation rate for both private and public capital is set to 0.025, such that the average annual depreciation rate is 10%, following Leeper, Walker, and Yang (2010). The investment adjustment cost parameter I is given a value of 2, following Chang et al (2021).…”

“…Similar to Bouakez, Cardia, and Ruge‐Murcia (2009) and Chang et al. (2021), we allow for imperfect substitutability of labor inputs across public infrastructure and private firms to capture frictions in labor mobility. The labor supply is a constant elasticity of substitution composite of hours worked in each sector.…”

“…They find that long implementation delays, as well as distortionary fiscal financing, can significantly dampen the stimulative effects of infrastructure spending. Chang et al (2021) study how fiscal policy changes in the public sector spillover to private sector. Our paper extends this literature by studying government-backed credit expansion that specifically targets the infrastructure sector.…”

“…Chang et al. (2021) study how fiscal policy changes in the public sector spillover to private sector. Our paper extends this literature by studying government‐backed credit expansion that specifically targets the infrastructure sector.…”