Evaluating Labor Market Targeted Fiscal Policies in High Unemployment EZ Countries

49 Pages Posted: 15 Mar 2014

See all articles by Elton Beqiraj

Elton Beqiraj

Sapienza University of Rome, Department of Public Economics

Massimiliano Tancioni

Sapienza University of Rome, Department of Public Economics

Date Written: March 14, 2014

Abstract

We develop a monetary open economy model characterized by a highly detailed labor market structure and fiscal sector. By introducing a distinction between the wage negotiated by newly hired workers and incumbents, we evaluate the efficacy of two labor market targeted fiscal policies, a hiring subsidy and a wage subsidy for new hires of labor, and compare them with that implied by standard fiscal instruments. The model is estimated with Bayesian techniques using data for high unemployment countries of the EZ periphery (Greece, Ireland, Italy, Portugal and Spain). From posterior simulations we show that, except Greece, the labor market policies are not superior to standard fiscal expansions in stimulating economic activity, and the effects on employment are clearly superior only in the long term and at the Greece and Ireland's model parameter estimates. The consideration of a liquidity trap environment reinforces these results.

Keywords: wage and hiring subsidies, search and matching, fiscal multiplier, zero lower bound, Bayesian

JEL Classification: E62, H25, H30, J20, C11

Suggested Citation

Beqiraj, Elton and Tancioni, Massimiliano, Evaluating Labor Market Targeted Fiscal Policies in High Unemployment EZ Countries (March 14, 2014). Available at SSRN: https://ssrn.com/abstract=2409138 or http://dx.doi.org/10.2139/ssrn.2409138

Elton Beqiraj

Sapienza University of Rome, Department of Public Economics ( email )

Via del Castro Laurenziano 9
Rome
Italy

Massimiliano Tancioni (Contact Author)

Sapienza University of Rome, Department of Public Economics ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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