Fiscal transfers and distributive conflict in a simple endogenous growth model with unemployment

In the simplified formal treatment proposed in this paper, a decrease in a policy parameter—the ratio of total tax revenues to GDP—can monotonically increase long-term growth rate and may lead to a higher employment level. This notwithstanding, the paper shows that the redistributive implications of such a decrease may induce the wage earners to oppose it. As a consequence, policy makers reflecting social preferences may undertake redistributive transfers generating persistent unemployment and lowering growth even if commitment technologies allowing them to follow pre-announced tax policies were feasible.