Imperfect mobility of labor across sectors and fiscal transmission

Cardi, Olivier and Restout, Romain and Claeys, Peter (2020) Imperfect mobility of labor across sectors and fiscal transmission. Journal of Economic Dynamics and Control, 111. ISSN 0165-1889

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Abstract

Our paper investigates the sectoral effects of government spending shocks and highlights the role of labor mobility. Our VAR evidence for sixteen OECD countries reveals that a shock to government consumption by 1% of GDP increases non-traded value added by 0.7% of GDP and generates a decline in traded value added. The value added share of non-tradables rises by 0.35% of GDP, thus implying that the reallocation of resources accounts for 50% of the sectoral fiscal multiplier. Consistently, our estimates show that the non-traded sector is highly intensive in the government spending shock and experiences a labor inflow. The shift of hours worked toward the non-traded sector is, however, subject to mobility costs which vary across countries. When we explore quantitatively the sectoral effects of a shock to government consumption that is highly intensive in non-traded goods, we find that the model can replicate the magnitude of the rise in the share of non-tradables we document empirically once we allow for both labor mobility and capital installation costs. Financial openness also matters as it further biases the demand shock toward non-tradables. To account for the cross-country dispersion in the responses of sectoral shares we estimate empirically, we have to let the degree of labor mobility vary across countries.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Economic Dynamics and Control
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, 111, 2020 DOI: 10.1016/j.jedc.2019.103815
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2600/2604
Subjects:
ID Code:
139200
Deposited By:
Deposited On:
19 Dec 2019 10:40
Refereed?:
Yes
Published?:
Published
Last Modified:
06 Apr 2020 01:40