Fiscal Consolidation and Public Wages

By Juin-Jen Chang, Hsieh-Yu Lin, Nora Traum, Shu-Chun Susan Yang

June 10, 2019

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Juin-Jen Chang, Hsieh-Yu Lin, Nora Traum, and Shu-Chun Susan Yang. Fiscal Consolidation and Public Wages, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Labor, Public employment, Real wages, Wage adjustments, Wages

Keywords: Bayesian estimation, Eastern Europe, Fiscal consolidation, Fiscal policy, Global, Goods demand, Goods price, Goods purchase, Government spending, Market clearing condition, Mobility friction, New Keynesian model, Nominal wage, Public employment, Public wage, Real wage, Real wages, Reallocation effect, State and local governments, Wage adjustments, Wages, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/125
Stock No:

WPIEA2019125
ISBN:

9781498316835
ISSN:

1018-5941

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