I develop a New Keynesian model in which a type of government
multiplier doubles when unemployment rises from 5 percent to
8 percent. This multiplier indicates the additional number of workers
employed when one worker is hired in the public sector. Graphically,
in equilibrium, an upward-sloping quasi-labor supply intersects a
downward-sloping labor demand in a (employment, labor market
tightness) plane. Increasing public employment stimulates labor
demand, which increases tightness and therefore crowds out private
employment. Critically, the quasi-labor supply is convex. Hence,
when labor demand is depressed and unemployment is high, the
increase in tightness and resulting crowding-out are small.
"A Theory of Countercyclical Government Multiplier."
American Economic Journal: Macroeconomics,
General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
Business Fluctuations; Cycles