Fiscal Consolidation and Public Wages

Download or read book Fiscal Consolidation and Public Wages written by Juin-Jen Chang and published by International Monetary Fund. This book was released on 2019-06-10 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.