Faculty of Economics and Business Administration Publications Database

Budgetary policy and unemployment dynamics in an olg model with collective bargaining

von Thadden, Leopold
Volume: 114
Pages: 867 - 889
Month: October
ISSN-Print: 0013-0133
Link External Source: Online Version
Year: 2004

We consider a dynamic general equilibrium model with capital accumulation and collective wage bargaining and investigate how unemployment responds to structural shocks under two stylised budgetary policies. Under balanced budgets, tax adjustments lead to higher unemployment on impact but enable a quick recovery of employment. By contrast, unbalanced budgets mitigate unemployment effects on impact but dynamics are more persistent due to weaker capital accumulation and future fiscal consolidations. These results are consistent with empirical evidence on a positive cross-country relationship between government borrowing and unemployment persistence. Copyright 2004 Royal Economic Society.