Joint with O. Cardi et P. Claeys
Abstract: Our paper investigates the impact of government spending shocks on relative sector size and contrasts the eﬀects across countries. Using a panel of sixteen OECD coun-tries over the period 1970-2007, our VAR evidence shows that a rise in government consumption i) increases the share of non tradables in labor and real GDP while low-ering the share of tradables, and ii) causes a signiﬁcant increase in non traded wages relative to traded wages. While the ﬁrst ﬁnding reveals that the non traded sector is more intensive in the government spending shock and experiences a labor inﬂow that increases its relative size, the second ﬁnding suggests the presence of labor mobility costs preventing wage equalization across sectors. These labor mobility costs appear to play a key role in determining changes in relative sector size across time and space. Whilst the responses of intersectoral labor reallocation and sectoral shares are found empirically to decline over time, the share of non tradables increases more in countries where the degree of labor mobility across sectors is higher. To account for our evidence, we develop an open economy version of the neoclassical model with tradables and non tradables. Our quantitative analysis shows that the open economy model is successful in replicating the responses of sectoral output shares to a ﬁscal shock, as long as we allow for a difficulty in reallocating labor across sectors along with adjustment costs to capital accumulation. Finally, calibrating the model to country-speciﬁc data, we are able to generate a cross-country relationship between the degree of labor mobility and the responses of sectoral output shares which is similar to that in the data.
Keywords: Fiscal policy; Labor mobility; Investment; Current account; Non trad-ables; Sectoral wages.
JEL Classiﬁcation: E22; E62; F11; F41; J31.