The Effects of Fiscal Shocks on Employment and the Real Wage

28 Pages Posted: 29 Jan 2009

See all articles by Evi Pappa

Evi Pappa

London School of Economics & Political Science (LSE); Autonomous University of Barcelona - Department of Economics and Economic History

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.

Suggested Citation

Pappa, Paraskevi (Evi), The Effects of Fiscal Shocks on Employment and the Real Wage. International Economic Review, Vol. 50, Issue 1, pp. 217-244, February 2009, Available at SSRN: https://ssrn.com/abstract=1333890 or http://dx.doi.org/10.1111/j.1468-2354.2008.00528.x

Paraskevi (Evi) Pappa (Contact Author)

London School of Economics & Political Science (LSE) ( email )

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London WC2A 2AE
United Kingdom
+44 20 7955 7584 (Phone)
+44 20 7831 1840 (Fax)

Autonomous University of Barcelona - Department of Economics and Economic History ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain

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