Unemployment fiscal multipliers

• Published in: Journal of monetary economics Vol. 57; no. 5; pp. 531 - 553
• Main Authors: Monacelli, Tommaso, Perotti, Roberto, Trigari, Antonella
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.07.2010; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Monetary Economics
• Subjects: Debt financing; Economic history; Economic models; Employment creation; Employment level; Fiscal policy; GDP; Gross Domestic Product; Keynesian theory; Labor market; Labour market; Macroeconomics; Studies; U.S.A; Unemployment; Unemployment Labor market Fiscal policy; United States > US; E62; Fiscal policy; Labor market; E21; Unemployment; D91
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2010.05.009

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 percent (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.