Three essays on employment and fiscal policy

Abstract

The thesis is devoted to study some aspects related to the dynamics of the labor market, and is composed by three chapters. Chapter 1 verifies whether fiscal policy triggers hysteresis in the labor market, influencing the economy equilibrium. To this aim, we employ a panel structural VAR (P-SVAR) where the identification of fiscal shocks is achieved using a narrative measure of consolidation policy. The narrative measure builds on the Devries et al. (2011) dataset and successive extensions (Alesina et al 2014), which recollects all the consolidation actions in 16 OECD countries in the period 1978-2013. The results suggest that while tax hikes reduces the economic activity and its potential levels persistently, spending cuts have not significant effects. This implies that only taxation is able to trigger an hysteresis process. Chapter 2 (coauthored with Stefano Scalone, University of Verona) presents an innovative method to estimate trend employment. As a matter of facts, the long-term dynamic of employment is highly influenced by demographic and social factors, as aging and schooling. In order to incorporate directly these factors in the trend estimation, we perform a two-step estimation process in a state-space framework: first, we conduct the analysis separately by age cohort and gender, second, we aggregate the series estimated to obtain the population values. This procedure allows us to shape and customize the estimation method depending on the segment of the population. Chapter 3 sheds some light on the role of labor market frictions, summarized by the level of protection of employment (EPL), in the transmission of consolidation shocks to the economy. This is crucial to understand how the effects of consolidation packages may change when a labor market reform is implemented, as the major economic institutions recently recommended. This Chapter extends the results presented in Chapter 1, estimating the effects of fiscal policy with the local projection methodology (Jordà 2005) which can easily introduce and accommodate for non-linear effects. The results suggest a different behavior of tax- and spending-based consolidation in high- and low-EPL countries. This difference seems to depend on a different effect of consolidation on wages across the two regions.