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Welfare Spending in the Long Run

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  • Divounguy Nding, Orphe

Abstract

In this paper,we construct an equilibrium search model of the labor market augmented to include lump sum taxes that finance government expenditures. Using the model, we can decompose the decline in labor force participation (LFP) into the policy effect and that of other factors such as declining economic output. Using census data for the state of Ohio, we learn that declining LFP and the increase in public assistance spending were caused by weaker economic output that led to an increase in the claimant count. Our results indicate that if the economy resembled the pre-crisis period, the Kasich administration would have led to an increase in LFP of approximately 0.6 percentage points. This effect goes up to 2% if all inactive workers are assumed to claim welfare income.

Suggested Citation

  • Divounguy Nding, Orphe, 2015. "Welfare Spending in the Long Run," MPRA Paper 68446, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68446
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    References listed on IDEAS

    as
    1. Pappa, Evi & Brückner, Markus, 2010. "Fiscal expansions affect unemployment, but they may increase it," CEPR Discussion Papers 7766, C.E.P.R. Discussion Papers.
    2. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
    3. Karel Mertens & Morten Overgaard Ravn, 2011. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 27-54, January.
    4. Timothy J. Bartik, 2000. "Displacement and Wage Effects of Welfare Reform," Book chapters authored by Upjohn Institute researchers, in: David E. Card & Rebecca M. Blank (ed.),Finding Jobs: Work and Welfare Reform, pages 72-122, W.E. Upjohn Institute for Employment Research.
    5. Karel Mertens & Morten Overgaard Ravn, 2011. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 27-54, January.
    6. Darren Lubotsky, 2004. "The Labor Market Effects of Welfare Reform," ILR Review, Cornell University, ILR School, vol. 57(2), pages 249-266, January.
    7. repec:bla:scandj:v:109:y:2008:i:4:p:743-777 is not listed on IDEAS
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    More about this item

    Keywords

    Government Spending; Taxation; Unemployment Insurance; Search Theory;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J0 - Labor and Demographic Economics - - General
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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