Fiscal policy and the labor market in a New Keynesian framework

Abstract

In the first chapter I calculate unemployment multipliers of fiscal policies. As an innovation, I include family firms in a New Keynesian model with search and matching frictions; they behave differently in the labor market and are differently managed. Based on European data I find that both at peak and cumulatively, unemployment reacts least when consolidation is done by increasing the value-added tax. However, this policy results in the steepest decline in consumption. Also, ignoring sectoral heterogeneity might lead to incorrect conclusions. Next, with Magnus Saxegaard we investigate the macroeconomic impacts of deregulating the labor and product markets. The novelty of the model, which was jointly developed with Rahul Anand and Purva Khera, is the inclusion of an underground sector in an open- economy model. It is a major determinant of the sign and the magnitude of reactions. We show that in South Africa both reforms increase long-run output, although labor market reforms are more successful in decreasing unemployment. Nevertheless, there are short-term costs; which can be mitigated reform packages. Finally, we find that it is usually better to start with a labor market reform. The last chapter focuses on southern Europe where high levels of government debt are coupled with rapid population aging. With Daniel Baksa we examine the macroeconomic effects of public old-age pension reforms and other policies under conditions of aging. As a novelty, we incorporate a shadow economy into an overlapping generations model. We find that a retirement age increase implies the lowest reduction in long-run GDP, although there are doubts about its feasibility. Impacts, in general, depend on the type of pension plan. Furthermore, when moving away from the PAYG towards a fully funded regime the pension-wage replacement rate temporarily sharply drops. The presence of informality and unemployment are important, in particular for responses of labor income tax hikes.