GROWTH, UNEMPLOYMENT, AND FISCAL POLICY: A POLITICAL ECONOMY ANALYSIS

This study presents an overlapping-generations model featuring capital accumulation, collective wage-bargaining, and probabilistic voting over fiscal policy. The study characterizes a Markov-perfect political equilibrium of the voting game within and across generations, and it derives the following results. First, the greater bargaining power of unions lowers the capital growth rate and creates a positive correlation between unemployment and public debt. Second, an increase in the political power of elderly persons lowers the growth rate and shifts government expenditure from unemployed persons to elderly ones. Third, prohibiting debt finance increases the growth rate and benefits future generations; however, it worsens the state of present-day employed and unemployed persons.