As explained above, due to the fact that the decision to hire a worker is forward-looking in a model with search frictions, one would expect that delays in the delivery of public investment are less detrimental in the short run. Forward-looking firms anticipate the increase in future productivity regardless of the delay (it is just shifted farther in the future), and because it takes time to hire workers, they start hiring workers already now. This brings some of the benefits of higher future productivity forward. Figure 3 indicates that there is indeed some evidence of such a channel. Labour increases during the planning phase, if the planning phase is not too long, and decreases by less than in the standard model if the planning phase is long. The outcomes for output are similar, with output mildly increasing during the delay phase for short delays, and remaining practically unchanged for longer delays.
Private consumption increases for the same reason as in the standard model, i.e., an expected long-run increase in available resources due to the higher level of productive public capital. Private investment increases by less than in the standard model during the delay phase because labour does not decrease as much and a greater share of aggregate demand can be met in production using labour. Wages increase, but less than in the standard model because labour increases (or falls by less than in the standard model). As a result, output increases during the planning phase.
Inflation also increases already on impact and tends to stay above zero until the outlays for public investment begin, when it increases again. The initial increase in inflation is due to higher demand that has not been met by the increase in quantities supplied. The initial increase in inflation quickly disappears as supply increases, which is in part due to new hiring being brought forward. As explained in Section 2, new hiring in the search model does not depend only on wages, but also on the probability that a firm will be able to find a worker, which takes time. Firms therefore start hiring immediately when there is news about the needs for workers in the future, as long as that future is not too far away. This can clearly be seen if a 2-year delay and a 5-year delay are compared. When the delay is short, firms increase hiring, while if the delay is longer, firms still decrease hiring, although not as much as in the standard model. We further explore this issue in the next section.
Note also that the long-run effects of increasing public investment in the search model are somewhat larger than in the standard model. This happens because in the long run, labour increases (note that labour fell in the long run in the standard model), which happens because labour demand effect from higher level of public capital dominates the negative labour supply effect. Higher stock of productive public capital increases the value of each worker for the firm, and this increase is permanent. In the long run, firms increase the level of vacancies, and this implies more hiring of workers (lower long-run unemployment). While households still reduce the per-capita hours worked, the effect of hiring (extensive margin) dominates the effect of hours (see also next section).