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

The purpose of this paper is to provide a micro-economic foundation for an argument that the direct employment by the government is more desirable than the government purchase of private goods to eliminate unemployment. A general equilibrium model with monopolistic competition is devised, and the effects of policies (government purchase, tax rate operation, and government employment) 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 the government not only increases private employment but also raises prices; (2) the government employment can achieve full employment without causing a rise in prices.