engleski

Fiscal consolidation – impact on Labor market outcomes

The existing literature indicates that fiscal consolidation can result in long-lasting negative effects on the labor market (IMF, 2014). In addition, the literature also recognizes possible positive effects of fiscal consolidation. This paper adds to the literature by tackling the issue of fiscal consolidation through an empirical investigation focusing on labor market. More precisely, it investigates the effects on a set of specific labor market outcomes: employment rate, unemployment and activity. Given that the debate on labor market impact of expenditure-based versus revenue-based consolidations is not settled in the literature, the special attention in this paper has been dedicated to the effects of the design of fiscal consolidation on the labor market outcomes. Additional contribution of this paper relates to the usage of the relatively new database on fiscal consolidations (Devries et al, 2011) in 17 OECD countries covering the period 1978 – 2009. This new approach, following the narrative approach introduced by Romer and Romer (2010) suggests that previous empirical literature has been contaminated by using the indicators for fiscal consolidation which may be subject to serious miss measurements errors leading to a strong bias towards finding an expansionary effect of fiscal consolidation. Recognizing this as a serious obstacle the present paper first provides a brief review on the problems in the previous literature and then applies the empirical investigation using the new database which successfully removes most of the problems in providing the representative indicators for fiscal consolidation. Using these new indicators the paper next provides a thorough empirical investigation through the use of panel data analysis. The findings from this investigation provide novel empirical evidence concerning the effects of fiscal consolidation on labor market outcomes.

Fiscal consolidation, labor market outcomes, panel data

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