Public Finance, Unemployment and Growth

In view of the challenges of globalization and the resulting needs for structural adjustments, economic policy- makers aiming at higher economic growth and lower unemployment have to base their decisions on thorough theoretical and empirical foundations. In particular, allocative and distributive aspects of external changes and of policy effects have to be taken into account, and an intertemporal (dynamic) perspective is required to arrive at appropriate advices for decision makers in the public sector. This project aims at complementing existing applied economic research in Austria by developing and applying an empirically implemented (computable, numerical) dynamic general equilibrium model for that country in order to study the role and the dynamic effects of public sector policies. Policy problems to be investigated include unemployment due to real and human capital shortages, effects of tax reforms, and trade integration and globalization effects.

Public Finances and social policy measures may have strong and often unexpected effects on unemployment and economic growth. These effects can be analyzed with the help of so-called dynamic general equilibrium models that were developed in this project. For instance, it can be shown that lowering the pension replacement rate and increasing the retirement age can have strong labor market effects. They strengthen labor supply both in terms of hours worked and job search intensity, leading to lower unemployment rates. Moreover, we show how specific educational policy strategies to strengthen skill formation and growth can help to partially offset the decline in the physical labor force as a result of aging due to demographic changes. Some other results derived with the model are: Immigration may reduce public spending in the host country. The Eastern enlargement of the European Union has both positive employment and welfare effects.