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Fiscal Consolidation and Public Wages
Author:
Juin-Jen Changnull

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,
Hsieh-Yu Linnull

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,
Ms. Nora Traumnull

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, and
Susan Yang Shu-Chunnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 125
Language:
English
Publication Date:
10 Jun 2019
DOI:
https://doi.org/10.5089/9781498316835.001
ISBN:
9781498316835
ISSN:
1018-5941
Pages:
52
Keywords:
WP; nominal wage; real wage; public wage; fiscal consolidation; government spending; fiscal policy; New Keynesian model; Bayesian estimation; state and local governments; goods purchase; market clearing condition; goods demand; mobility friction; reallocation effect; goods price; Wages; Public employment; Real wages; Wage adjustments; Eastern Europe; Global
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2019: Issue 125