Rolling Back the Public Sector - Differential Effects on Unemployment, Investment and Growth

Frederick (Rick) van der Ploeg

No 4896, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment and non-Walrasian labour markets on these results are considered as well.

Keywords: Fiscal retrenchment; Public employment; Labour market; investment; Growth (search for similar items in EconPapers)
JEL-codes: D90 E20 E60 H30 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-mac and nep-pbe
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Journal Article: Rolling back the public sector: differential effects on employment, investment, and growth (2006)
Working Paper: Rolling Back the Public Sector - Differential Effects on Employment, Investment and Growth (2003)
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