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The employment effect of changes in the composition of fiscal consolidations

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  • Verónica Escudero
  • Elva López Mourelo

Abstract

This paper assesses the magnitude and nature of fiscal consolidation policies and their impact on employment. In particular, in an attempt to address fiscal imbalances in the near term, countries have been faced with the delicate challenge of doing so without damaging recovery prospects and thus, counter to their original aim, worsening further public finances. In this regard, the paper reviews recent austerity measures adopted by governments and discusses how prolonging fiscal consolidation measures in their current form could be counterproductive for guaranteeing debt sustainability. Moreover, the article shows how poorly designed fiscal cuts – directly or indirectly affecting labour – seem to have been dampening job prospects. The paper sheds light on how fiscal and employment goals can be achieved together. More specifically, it finds that a fiscally-neutral change in the expenditure and revenue composition of fiscal consolidation can boost job creation. In this sense, the paper shows that it is imperative to find the right policy mix and recommends countries to be mindful of the nature and pace of consolidation.

Suggested Citation

  • Verónica Escudero & Elva López Mourelo, 2017. "The employment effect of changes in the composition of fiscal consolidations," International Review of Applied Economics, Taylor & Francis Journals, vol. 31(1), pages 45-68, January.
    • Handle: RePEc:taf:irapec:v:31:y:2017:i:1:p:45-68
    DOI: 10.1080/02692171.2016.1221388
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    References listed on IDEAS

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    2. Ms. Selma Mahfouz & Mr. Richard Hemming & Mr. Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity: A Review of the Literature," IMF Working Papers 2002/208, International Monetary Fund.
    3. M. Hashem Pesaran, 2021. "General diagnostic tests for cross-sectional dependence in panels," Empirical Economics, Springer, vol. 60(1), pages 13-50, January.
    4. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    5. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, March.
    6. Blyth, Mark, 2013. "Austerity: The History of a Dangerous Idea," OUP Catalogue, Oxford University Press, number 9780199828302.
    7. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2010. "The future of public debt: prospects and implications," BIS Working Papers 300, Bank for International Settlements.
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    Cited by:

    1. Hüseyin ŞEN & Ayşe KAYA, 2017. "Mali Konsolidasyon Büyüme ve İstihdam için Bir Çıpa mı, Mali Tuzak mı? Teorik ve Ampirik Literatür Temelli Bir Analiz," Sosyoekonomi Journal, Sosyoekonomi Society, issue 25(34).
    2. Philip Arestis & Ayşe Kaya & Hüseyin Şen, 2018. "Does fiscal consolidation promote economic growth and employment? Evidence from the PIIGGS countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 15(3), pages 289-312, November.
    3. Sandrine Michel, 2018. "Social spending as a driver of economic growth: has the theoretical consensus of the 1980s led to successful economic policies?," Post-Print hal-01944296, HAL.

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