Unemployment Fiscal Multipliers
We estimate the effects of fiscal policy on the labor market in US data. An increase in government spending of 1 percent of GDP generates output and unemployment multipliers respectively of about 1.2 per cent (at one year) and 0.6 percentage points (at the peak). Each percentage point increase in GDP produces an increase in employment of about 1.3 million jobs. Total hours, employment and the job finding probability all rise, whereas the separation rate falls. A standard neoclassical model augmented with search and matching frictions in the labor market largely fails in reproducing the size of the output multiplier whereas it can produce a realistic unemployment multiplier but only under a special parameterization. Extending the model to strengthen the complementarity in preferences, to include unemployment benefits, real wage rigidity and/or debt financing with distortionary taxation only worsens the picture. New Keynesian features only marginally magnify the size of the multipliers. When complementarity is coupled with price stickiness, however, the magnification effect can be large.
Written for the November 2009 Carnegie Rochester Conference "Fiscal Policy in an Era of Unprecedented Budget Deficits". This paper was produced as part of the project Growth and Sustainability Policies for Europe (GRASP), a Collaborative Project funded by the European Commission's Seventh Research Framework Programme, Contract number 244725.We thank Andy Abel, Monika Merz (our discussant), the conference participants, and participants to seminars at Humboldt Berlin, London School of Economics and Université Catholique de Louvain la Neuve for very useful comments. All errors our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Monacelli, Tommaso & Perotti, Roberto & Trigari, Antonella, 2010. "Unemployment fiscal multipliers," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 531-553, July. citation courtesy of