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The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery

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  • Mosley, Max

Abstract

This paper demonstrates how changes to welfare generosity during recessions induces a greater than usual economic response. This is predicated on the assumption that welfare recipients are likely to be liquidity-constrained and therefore highly responsive to a change in temporary income. This would result in two conclusions, (i) the effects of fiscal stimulus can be maximised when channelled through welfare and (ii) fiscal consolidation from these programs will have a strong contractionary effect on domestic output. Using tax-benefit microsimulation model UKMOD, we find 71% of means-tested welfare recipients are liquidity-constrained. We use this finding to calibrate an open-economy New Keynesian macroeconomic model to therefore illustrate the economic implications of positive changes to the program’s generosity, finding an impact fiscal multiplier of 1.5. For cuts to contributions, we find a negative multiplier of 1.8, implying past cuts to welfare had a sizeable contractionary effect on macroeconomic recovery.

Suggested Citation

  • Mosley, Max, 2021. "The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery," MPRA Paper 108620, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108620
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    Cited by:

    1. Max. A. Mosley & Edmund Cornforth, 2023. "The Macroeconomic Effect of the UK’s 2022 Cost-of-Living Payments," Discussion Papers 2316, Centre for Macroeconomics (CFM).

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    More about this item

    Keywords

    Liquidity-Constrains; UKMOD; Fiscal Policy;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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