Public capital and long-term labour market performance in Belgium

This paper investigates the long-term output and labour market effects of public capital in Belgium within a broad model explaining private sector output and costs, private employment and capital formation, wage bargaining, price setting and aggregate demand. Model simulations show strong positive effects of public capital on private output and capital formation. Public capital and private employment, however, are found to be substitutes. A clear negative effect of public capital on employment remains, also after taking into account the effects of public investment on aggregate demand, productivity and wage formation. As to policy, this paper supports the case for an increase in public investment spending, complemented by structural labour market reform. (C) 2004 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.