Fiscal Expansions, Unemployment, and Labor Force Participation: Theory and Evidence

24 Pages Posted: 11 Oct 2012

See all articles by Markus Bruckner

Markus Bruckner

affiliation not provided to SSRN

Evi Pappa

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

Date Written: November 2012

Abstract

Structural VARs indicate that for many OECD countries labor force participation, employment, and the unemployment rate significantly increase following increases in government expenditures under a variety of specifications and identification schemes. Fiscal expansions also tend to increase real wages. Existing models have difficulties in generating such responses. We show that the empirical regularities can be reproduced with two additions into a standard New Keynesian model with matching frictions: (a) a labor force participation choice and (b) workers’ heterogeneity.

Suggested Citation

Bruckner, Markus and Pappa, Paraskevi (Evi), Fiscal Expansions, Unemployment, and Labor Force Participation: Theory and Evidence (November 2012). International Economic Review, Vol. 53, Issue 4, pp. 1205-1228, 2012, Available at SSRN: https://ssrn.com/abstract=2160163 or http://dx.doi.org/10.1111/j.1468-2354.2012.00717.x

Markus Bruckner

affiliation not provided to SSRN

Paraskevi (Evi) Pappa

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

Houghton Street
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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