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Fiscal Consolidation and Public Wages

Juin-jen Chang, Hsieh-Yu Lin, Nora Traum and Shu-Chun Yang

No 2019/125, IMF Working Papers from International Monetary Fund

Abstract: A New Keynesian model with government production, public compensation, and unemployment is fit to U.S. data to study the macroeconomic and fiscal effects of public wage reductions. We find that accounting for the type of government spending is crucial for its macroeconomic implications. Although reductions in public wages and government purchases of goods have similar effects on total output and the fiscal balance, the former can raise private output slightly, in contrast to the substantial contractionary effects of the latter. In addition, the baseline estimation finds that exogenous public wage reductions decrease private wages. Model counterfactuals show that sufficiently rigid nominal private wages can reverse the response of private wages, as the rigidity dampens the labor reallocation effect from the public to private sector that exerts downward pressure on private wages.

Keywords: WP; nominal wage; real wage; public wage; fiscal consolidation; government spending; fiscal policy; New Keynesian model; Bayesian estimation; state and local governments; goods purchase; market clearing condition; goods demand; mobility friction; reallocation effect; goods price; Wages; Public employment; Real wages; Wage adjustments; Eastern Europe; Global (search for similar items in EconPapers)
Pages: 52
Date: 2019-06-10
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: Fiscal Consolidation and Public Wages (2021) Downloads
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