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THE EFFECTS OF FISCAL SHOCKS ON EMPLOYMENT AND THE REAL WAGE *
Author(s) -
Pappa Evi
Publication year - 2009
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2008.00528.x
Subject(s) - economics , consumption (sociology) , business cycle , wage , investment (military) , real wages , fiscal policy , new keynesian economics , government (linguistics) , labour economics , government spending , aggregate (composite) , monetary economics , macroeconomics , monetary policy , market economy , social science , linguistics , philosophy , materials science , sociology , politics , political science , welfare , law , composite material
We study the transmission of fiscal shocks in the labor market. We employ a structural VAR and base identification on the restrictions that shocks to government consumption, investment, and employment must raise output and deficits. These restrictions hold in both prototype Real Business Cycle (RBC) and New Keynesian models. Shocks to government consumption and investment increase real wages and employment contemporaneously, both at state level and in the aggregate. The dynamics in response to employment shocks are mixed: Increases in government employment raise the real wage and total employment in the aggregate. However, in one third of the states they reduce total employment.