A Numerical Approach to Fiscal Policy, Unemployment and Growth in Europe

IGIER Working Paper No. 155

39 Pages Posted: 5 Nov 1999

See all articles by Francesco Daveri

Francesco Daveri

University of Parma - Dipartimento di Economia; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Marco Maffezzoli

Bocconi University - Department of Economics

Date Written: September 1999

Abstract

Europe is faced with serious problems of slow growth and little employment creation. Are the two problems related at all? Our proposed answer is: yes, they are. Building on Daveri and Tabellini (1997), we developed an infinite-horizon model with endogenous growth due to learning-by-doing and unemployment due to monopoly union bargaining in the labor market. In this framework, high labor and capital taxes and unemployment subsidies may in principle reduce employment and growth. The model is then calibrated using actual data from a variety of countries in Continental Europe, which we identify as the closest to our toy model. We run two types of balanced-budget fiscal policy experiments, focusing on their employment and growth effects. First, we separately change tax rates on capital, labor and subsidies, as well as replacement rates, while assuming that the government budget is kept balanced by appropriate changes in lump-sum transfers. Second, we cut labor taxes and adjust capital taxes in order to keep the GDP share of lump-sum transfers unchanged. Our numerical results suggest that, in the absence of binding revenue constraints, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while capital taxes are less useful. If revenue constraints are binding, instead, cutting labor taxes is in general ineffective in boosting employment and growth.

JEL Classification: E13, E24, E62, J51, O41

Suggested Citation

Daveri, Francesco and Maffezzoli, Marco, A Numerical Approach to Fiscal Policy, Unemployment and Growth in Europe (September 1999). IGIER Working Paper No. 155, Available at SSRN: https://ssrn.com/abstract=181295 or http://dx.doi.org/10.2139/ssrn.181295

Francesco Daveri (Contact Author)

University of Parma - Dipartimento di Economia ( email )

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Parma, Parma 43100
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HOME PAGE: http://www.igier.uni-bocconi.it/daveri/

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

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Milan, 20136
Italy
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Marco Maffezzoli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy