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

Andrea Tafuro ()
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Andrea Tafuro: Department of Economics, University Of Venice C� Foscari

No 2015: 03, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: This 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 cuts affect employment more than tax increases, while tax effects are larger on real per capita GDP. Such a result may be explained by different reactions of monetary policy. The evidence advocates that the multiplier is state-dependent, i.e. larger during recessions, and such effect is stronger on employment trend.

Keywords: fiscal policy; labor market; narrative approach; panel data; hysteresis (search for similar items in EconPapers)
JEL-codes: C23 E24 E62 (search for similar items in EconPapers)
Pages: pp 37
Date: 2015
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (1)

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