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
References: Add references at CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=46913 (application/pdf)
Related works:
Journal Article: Fiscal Consolidation and Public Wages (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2019/125
Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm
Access Statistics for this paper
More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi (amodi@imf.org).