A Fiscal Job? An Analysis of Fiscal Policy and the Labor Market

This paper examines the impact of fiscal policy on employment through the lenses of Okun'sLaw. Looking at the panel of OECD countries over the past three decades, we find that fiscalpolicy can affect employment beyond the impact it is traditionally assumed to exert through theoutput multiplier. In particular, this impact is found to be effective for most items of currentdiscretionary expenditure and for corporate income taxes and social security contributions.Okun's Law is found to be stable under almost all model specifications, but higher spending on subsidies and lower social security contributions can amplify the impact of the output gap on employment gaps.