Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155086
Authors: 
Petrucci, Alberto
Phelps, Edmund S.
Year of Publication: 
2000
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 32. 2000
Abstract: 
This paper examines the consequences of capital and labour subsidies for employment, capital formation and other macroeconomic variables within an OLG small open economy model of wealth accumulation. Two cases, the neoclassical-equilibrium one and the modern-equilibrium one, have been analysed. We discover that the employment effects of the subsidies studied differ significantly, while whether the subsidy hike is financed by an increase of payroll taxation or a decrease of employment subsidisation is immaterial for the qualitative effects on the macroeconomic system. In the neoclassical-equilibrium theory, a capital subsidy causes a temporary increase in hours worked which vanishes in the new long run, while an increase in labour subsidy has no aggregate effects on the macroeconomic equilibrium. The key finding of the modern-equilibrium case is the existence of a negative relationship between capital formation and employment. Capital subsidies boost investment and aggravate unemployment, while labour subsidies stimulate employment and may depress capital accumulation.
Subjects: 
Capital subsidy
employment subsidy
structural unemployment
wealth accumulation
JEL: 
E24
J32
J38
Document Type: 
Working Paper

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