Employment, Fiscal Policy, and Oligopsonistic Labour Market

This paper presents an investigation of the dynamic effects of fiscal policy in an inter-temporal optimisation model with an oligopsonistic labour market. In an oligopsonistic labour market, fiscal policy expands employment through a shift of labour demand and supply curves. Fiscal policy has a positive effect on physical capital. Consequently, fiscal expansion stimulates not only employment but also aggregate output. However, an increase in government spending that does not generate benefits cannot improve welfare. The extended model provides conditions for justification of active fiscal policy. 1