Abstract
This paper examines the impact of fiscal policy on employment through the lenses of Okun’s Law. Looking at the panel of OECD countries over the past three decades, we find that fiscal policy can affect employment beyond the impact it is traditionally assumed to exert through the output multiplier. In particular, this impact is found to be effective for most items of current discretionary expenditure and for corporate income taxes and social security contributions. Okun’s Law is found to be stable under almost all model specifications, but higher spending on subsidies and lower social security contributions can amplify the impact of the output gap on employment gaps.
Highlights
The global financial crisis has left its marks on labor market conditions in many advanced economies
The literature has addressed the role of fiscal policy for employment either as a derivate of the output multiplier literature or through studies on the impact of specific fiscal policy instruments, such as labor taxation and unemployment benefits
We provide an innovative angle to the analysis by examining the interplay of fiscal policy, employment and output through the lenses of Okun’s Law
Summary
The global financial crisis has left its marks on labor market conditions in many advanced economies. The literature has addressed the role of fiscal policy for employment either as a derivate of the output multiplier literature or through studies on the impact of specific fiscal policy instruments, such as labor taxation and unemployment benefits. Against this literature, we provide an innovative angle to the analysis by examining the interplay of fiscal policy, employment and output through the lenses of Okun’s Law. Observed first in the early 1960s, Okun’s Law captures the empirical regularity between employment (unemployment) and output, whereby output expansions are associated by employment expansions (or unemployment reductions)
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