EC-IILS Joint Discussion Paper Series No. 9

Collective bargaining, hours vs jobs and the fiscal multiplier

The current economic crisis has led several governments to conduct discretionary fiscal expansion to foster aggregate demand. The question of the effectiveness of fiscal policy has attracted an increasing interest within academic circles. A new body of literature on fiscal policy, making use of dynamic stochastic general equilibrium (DSGE) models, has recently emerged. In this paper, we aim at contributing to this new literature with a particular focus on the effects of expansionary fiscal policy on the labour market. In particular, we focus on the following three questions: (i) What are the effects of an increase in government spending on economic activity? (ii) How do changes in the labour input, induced by the rise in government spending, adjust along its two margins (hours of work per employed worker and employment) ? (iii) Is the choice of the bargaining scheme important for the propagation of government spending shocks to key labour market variables?