A micro-founded comparison of fiscal policies: indirect and direct job creation

Abstract

This paper provides a micro-economic foundation for an argument that direct employment by a government is more desirable than government purchase of private goods to eliminate unemployment. A general equilibrium model with monopolistic competition is devised, and the effects of policy parameters (government purchase, government employment, and tax rate) on macroeconomic variables (consumption, price, and profit) are investigated. It is shown that 1) the government purchase is inflationary in the sense that additional effective demand by a government not only increases private employment but also raises prices; 2) the government employment can achieve full employment without causing a rise in prices.Comment: 16 page