A Theory of Countercyclical ​Government Multiplier

author・Pascal Michaillat
date・January 2014
journal・American Economic Journal: Macroeconomics
volume・6
issue・1
pages・190–217
doi・https://doi.org/10.1257/mac.6.1.190
abstract・I develop a New Keynesian model in which a type of government multiplier doubles when unemployment rises from 5 percent to 8 percent. This multiplier indicates the additional number of workers employed when one worker is hired in the public sector. Graphically, in equilibrium, an upward-sloping quasi-labor supply intersects a downward-sloping labor demand in a (employment, labor market tightness) plane. Increasing public employment stimulates labor demand, which increases tightness and therefore crowds out private employment. Critically, the quasi-labor supply is convex. Hence, when labor demand is depressed and unemployment is high, the increase in tightness and resulting crowding-out are small.
figure 1・Effects of an increase in public employment (g) on private employment (l) and total employment (n) in the New Keynesian model with labor-market frictions.