The popularity of automatic stabilizers arises because they are rule based and do not suffer from information and implementation lags. Footnote 3 In particular, automatic stabilizers have been praised, and the crisis induced calls to strengthen automatic stabilizers by the OECD, IMF and EU Commission. It has been questioned whether fiscal policy reactions have been sufficiently strong-a difficult question to answer generally since the fiscal space for an active fiscal stabilization policy has been severely restricted in a number of countries. Discretionary fiscal policy actions should be employed only as an “escape clause” in particularly dire situations, which under any sensible definition would include the Great Recession.Īlthough monetary policies have been very expansionary in response to the Great Recession, they have not been sufficiently effective, Footnote 2 and this has brought fiscal policy back to the fore. The consensus view on stabilization prior to the Great Recession was that the main tool is monetary policy, Footnote 1 confining fiscal stabilization policies to the automatic stabilizers. Dismal experience with demand management policies during the 1970s and 1980s in combination with unemployment becoming persistent turned attention to structural issues, first wage formation and later search incentives. This type of policy has not been in vogue since the heydays of Keynesian economics. Since the crisis caused aggregate demand to fall, attention turned to aggregate demand management policies as the remedy to decrease unemployment. The crisis has severe direct social and economic consequences, but it also raises concerns that unemployment will become persistent as seen in earlier crises, especially in European countries. The crisis has proved long - lived, and employment rates have not yet recovered in most countries. In no less than 13 countries, GDP dropped by more than 5 % between 20, and unemployment rates increased by about 2.5 percentage points between 20 on average for OECD countries. The Great Recession was a source of large shocks generated outside the labour market but which via steep declines in aggregate demand had substantial employment effects.
Also, the potential sources of marginalization in the labour market are discussed. Finally, it is discussed to what extent aggregate demand management policy can stabilize labour markets and, in particular, whether it is well targeted towards marginalized groups. The criticism that automatic stabilizers may prolong downturns is also considered. It is considered whether it is possible to maintain strong automatic stabilizers without jeopardizing incentives via the design of the social safety net (workfare) or business cycle-dependent unemployment insurance. The paper considers the sources of automatic stabilizers and whether they (un)intentionally have been weakened via structural reforms to strengthen work incentives. Paradoxically, the disincentive effects of high participation taxes are often discussed at the same time as automatic stabilizers are praised.
The participation tax is a key determinant of the strength of the automatic stabilizers.
However, automatic stabilizers are not a result of macro design but the structure of the social safety net and the taxation system. In particular, automatic stabilizers are praised since they are rule based and thus operate swiftly and symmetrically across the cycle. The Great Recession has revived aggregate demand management policies.
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