Labor Share Heterogeneity and Fiscal Consolidation Programs

Pedro Brinca, Bruno Freitas and Margarida Mano
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Bruno Freitas: Nova School of Business and Economics (SBE)
Margarida Mano: Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra

No 2020-04, CeBER Working Papers from Centre for Business and Economics Research (CeBER), University of Coimbra

Abstract: We show that the labor share of income is an important factor affecting the mechanisms behind fiscal consolidation programs, thus requiring consideration when evaluating fiscal multipliers across countries. We calibrate a life-cycle, overlapping generations model to match key characteristics of different European economies and evaluate the recessive impacts of fiscal consolidation programs. We find a positive relationship between the labor share and the impact fiscal multipliers generated by our model. This result directly follows from the higher weight of labor on production and the lower opportunity cost of leisure present in economies with a higher labor share. Following the impact period, the relationship between the labor share and the fiscal multipliers is dependent on the type of fiscal instrument employed in the consolidation.

Keywords: Fiscal Consolidation; Labor Share; Fiscal Multipliers; Public Debt. (search for similar items in EconPapers)
JEL-codes: D33 E21 E62 H31 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2020-04
New Economics Papers: this item is included in nep-dge, nep-eec and nep-mac
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Citations: View citations in EconPapers (4)

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