Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers

Albertini, Julien; Auray, Stéphane; Eyquem, Aurélien

doi:10.2139/ssrn.3524378

Cited by 4 publications

(4 citation statements)

References 35 publications

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“…During high unemployment periods the rise in public employment increases labor market tightness to a small degree and also has a smaller crowding out effect on private employment. Albertini, Auray, Bouakez, and Eyquem (2020) consider a model with involuntary unemployment, incomplete markets and nominal rigidities. They are able to generate state dependent government multipliers as increased spending reduces unemployment and thus unemployment risk and precautionary savings to a greater extent during high unemployment periods.…”

Section: Related Literaturementioning

confidence: 99%

State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

Jo¹,

Zubairy²

2022

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This paper shows that the source of business cycle fluctuations matters for determining the size of government spending multipliers. We present a New Keynesian model with downward nominal wage rigidity (DNWR) and show that government spending is much more effective in stimulating output in a demand shock driven recession compared to a supply shock driven recession. Government spending multiplier is large when DNWR binds in a recession, but the nature of recession matters due to the opposing responses of inflation depending on the type of recession. In a demand-driven recession, inflation falls, preventing real wages from falling, leading to consequences for employment, while inflation rises in a supply-driven recession limiting the consequences of DNWR on employment. We document supporting empirical evidence, using both historical time series data and cross-sectional data from U.S. states, that the government spending multiplier for output is larger in a demanddriven recession compared to a supply-driven recession.

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Section: Related Literaturementioning

confidence: 99%

State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

Jo¹,

Zubairy²

2022

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“…Of course my results based on a purely linearized model rule out state-dependent multipliers by construction. Results from Albertini et al (2021), however, may provide some guidance on what a nonlinear model would have to say about potential asymmetric effects of government spending. Their framework combines search frictions in the labor market with partially insured unemployment risk.…”

Section: Discussionmentioning

confidence: 99%

Unemployment, Partial Insurance, and the Multiplier Effects of Government Spending

Givens

2022

Int Economic Review

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I interpret the empirical evidence on government spending multipliers using an equilibrium model of unemployment in which workers are not fully insured against the risk of job loss. Consumption of resources by the government affects aggregate spending along two margins: (i) an intensive margin owing to a fall in household wealth and (ii) an extensive margin that accounts for growth in the working population. At insurance levels below a certain threshold, the positive effects of (ii) dominate the negative effects of (i), leading to multipliers for private consumption and output that exceed zero and one. Similar results appear in a quantitative version of the model scaled to match estimates from micro data on the consumption cost of unemployment.

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“…There is much evidence in the literature that governmental policies designed with incentives for active employment or investments reduce unemployment by favorably influencing output/employment favorably (Escudero, 2018;Murtin and Robin, 2018;Holden and Sparrman, 2018;Br€ uchner and Pappa, 2012;Sparrman, 2011;Herwatz and Theilen, 2017;Hussein al-Tai, 2019;Michaillat and Saez, 2019;Kang, 2021;Huang and Yang, 2021;Albertini et al, 2021;Goemans, 2022). How social expenditures boost total demand will affect employment is worth addressing.…”

Section: Discussionmentioning

confidence: 99%

Social spending and chronic unemployment: evidence from OECD countries

Çelikay

2022

REPS

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PurposeSocial spending is at the forefront of the tools used to repair the damage caused by the global epidemic. However, one of the most critical questions in recent days is as follows: what are the effects of social expenditures in eliminating unemployment? The primary purpose of this article is to provide empirical evidence on the impact of social spending on chronic unemployment in the selected organization for economic co-operation and development (OECD) countries.Design/methodology/approachIn this study, the data of 30 selected OECD countries between 1991 and 2018 have been compiled. First, countries have been divided into four categories according to their spending intensity to determine the effects of social spending on the long-term unemployment rate. Then, the auto-regressive distributed lag (ARDL) approach and the error correction models (ECM) examine the variables' short- and long-term interactions.FindingsThe author found that the change in the share of social expenditures in GDP affects chronic unemployment similarly. This finding is consistent with the results of studies in the literature dealing with the relationship between public sector size and unemployment. However, the research findings are specifically about the effects of social expenditures on chronic unemployment. In this respect, the results reflect that expenditures with passive characteristics have an expansionary effect on long-term unemployment. In addition, the progressive effect of social expenditures on chronic unemployment is increasing in countries with high expenditure intensity. In countries with relatively low spending intensity, the impact of social spending is limited to the short run and is lower.Originality/valueMultiple studies have reported that public policies developed in line with the incentives of active employment and public or private sector investments reduce the unemployment rate by positively affecting the output/employment level. This study, unlike other studies, focuses on the effects of social expenditures on chronic unemployment. It also compares the effects of social spending on the long-term unemployment rate for countries with varying spending intensities. Therefore, this article tests the impact of social expenditures used against a concrete socioeconomic problem in the OECD sample. In this respect, the findings contribute to the literature by addressing the relationship between social spending and chronic unemployment.

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Taking off into the Wind: Unemployment Risk and State-Dependent Government Spending Multipliers

Abstract: Les documents de travail ne reflètent pas la position du CREST et n'engagent que leurs auteurs. Working papers do not reflect the position of CREST but only the views of the authors.

Cited by 4 publications

References 35 publications

State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

Unemployment, Partial Insurance, and the Multiplier Effects of Government Spending

Social spending and chronic unemployment: evidence from OECD countries

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