Evaluating Labor Market Targeted Fiscal Policies in High Unemployment EZ Countries

We develop a monetary open economy model characterized by a highly detailed labor market structure and fiscal sector. By introducing a distinction between the wage negotiated by newly hired workers and incumbents, we evaluate the efficacy of two labor market targeted fiscal policies, a hiring subsidy and a wage subsidy for new hires of labor, and compare them with that implied by standard fiscal instruments. The model is estimated with Bayesian techniques using data for high unemployment countries of the EZ periphery (Greece, Ireland, Italy, Portugal and Spain). From posterior simulations we show that, except Greece, the labor market policies are not superior to standard fiscal expansions in stimulating economic activity, and the effects on employment are clearly superior only in the long term and at the Greece and Ireland's model parameter estimates. The consideration of a liquidity trap environment reinforces these results