Public Spending, Market Imperfections, and Unemployment

Donatella Gatti (1, 2, 3, 4, 5)

1 PJSE - Paris-Jourdan Sciences Economiques
2 PSE - Paris School of Economics
3 CEPN - Centre d'Economie de l'Université Paris Nord
4 CEPREMAP - Centre pour la recherche économique et ses applications
5 IZA - Institute for the Study of Labor

This paper proposes a generalized wage-setting/price-setting model studying the impact of public spending on employment, in the presence of imperfect competition in labor and product markets. Public spending is shown to affect firms' profit margins and firms' labor demand schedules. The model highlights a new channel by which fiscal policy can improve employment. By reducing firms' mark-up, public spending helps countering the adverse effects of market power in imperfectly competitive goods markets.

Domaines: Economies et finances

Donatella Gatti. Public Spending, Market Imperfections, and Unemployment. Eastern Economic Journal, 2009, 35, pp.452-461. ⟨10.1057/eej.2008.44⟩. ⟨halshs-00754330⟩