The Effects of Fiscal Policy on Employment: An Analysis of the Aggregate Evidence

Abstract

Th i s s tud y i nve s ti gat e s w he t her f i scal p olic y is abl e t o affec t t he tre nd of emp l oy me n t r a te , t r i gge r in g hy ste res is i nd e pe nd e nt ly fr o m GDP be h avi or . I atte m p t t o s he d a l ig h t o n th i s is sue a na ly zi n g a Pa nel of 17 O EC D cou n tr ie s, c o ve r i n g t he pe r i od 198 0 -200 9 w it h a n nual d a ta . T he ef fect s of fisc al p o lic y ar e e s ti ma te d wit h a S VA R, w here t he ex o gen ou s fi sca l s h oc k is id e n ti fie d e mp l oy i n g a r e cen t d at ase t pr ov id e d by t he I MF, c o n tai ni n g pre d e te r m i ne d f i sc al po l ic y c ha n ges d ue t o fi sca l c o ns o lid a ti o n i ss ues . My resul t s su g ge st th at a f is c al s h ock ca n mod ify th e emp l oyme n t equi li br iu m leve l e ve n wi t h out i nf lu e nc i n g p ote n ti al ou t put . T he fi sca l mul ti pl ier f or th e e m pl oy me n t r ate tr e nd afte r t wo year s i s -0. 55 a nd acc ou n ts f or al m o st hal f o f t he mul ti p lie r f or ove r all e m pl oy me nt ra te (w h ic h i s -1 .1 0) , w hil e i s -0. 11 -a nd n o t s ig n ific an t -for t he p o te nt ial ou tp ut . T he m ul ti pl ier f or th e r e al p e r c a pi ta G DP i s -1 .04 , w hic h s h arp ly c o ntr as t s wi t h t he "ex pa n si o nar y aus te r ity " hy p o t he si s. Var i ou s exte n si o n s are pre se nt e d , co ns id e r in g t he r o le of co m p os it i o n, m o ne tary p o licy , a nd s ta ted epe nd e nc y . S pe nd in g c ut s affec t em p l oy me nt mo re t ha n ta x i ncrea se s, w hi le ta x e ffe c ts ar e lar ge r o n rea l pe r cap it a G DP. Su ch a re sul t m ay b e exp lai ne d by d if fe r e nt r e act io n s of m o net ar y p ol icy. T he e vid e nc e ad voc ate s t ha t the m ult ip lier i s s tate -d e pe n d en t, i.e . lar ger d ur i n g rec e s si o n s, an d suc h e ffe c t i s s tr on ger o n e m pl oy men t tre nd . Keywords AbstractThis study investigates whether fiscal policy is able to affect the trend of employment rate, triggering hysteresis independently from GDP behavior. I attempt to shed a light on this issue analyzing a Panel of 17 OECD countries, covering the period 1980-2009 with annual data. The effects of fiscal policy are estimated with a SVAR, where the exogenous fiscal shock is identified employing a recent dataset provided by the IMF, containing predetermined fiscal policy changes due to fiscal consolidation issues. My results suggest that a fiscal shock can modify the employment equilibrium level even without influencing potential output. The fiscal multiplier for the employment rate trend after two years is -0.55 and accounts for almost half of the multiplier for overall employment rate (which is -1.10), while is -0.11 -and not significant -for the potential output. The multiplier for the real per capita GDP is -1.04, which sharply contrasts with the "expansionary austerity" hypothesis. Various extensions are presented, considering the role of composition, monetary policy, and state-dependency. Spending ...

How tax reforms impact unemployment: Evidence from Azerbaijan

“…17 OECD countries were analyzed for measuring how fiscal policy affects the trend of employment rate, covering the period 1980-2009 with annual data. The research proposed that a fiscal shock can modify the employment equilibrium level even without influencing potential output (Tafuro, 2015). Another related study was conducted to define the employment effects of fiscal policy innovations utilizing the narrative approach for various ethnic/racial groups and separately for expansion and recessions.…”