We have updated our working paper, “Industry Evidence on the Effects of Government Spending.” Using a slightly different instrument for government demand, we now find that an increase in government demand raises output and hours but lowers real product wages and productivity, consistent with the neoclassical model of government spending.
Tag Archive for 'government'
Valerie Ramey and I have posted a draft of our new working paper, “Industry Evidence on the Effects of Government Spending,” which we will be presenting at the AEA meetings this weekend. In it we study how industry-level government spending effects output, hours, wages, and productivity.
This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but have no effect on real product wages, even over a five-year horizon. Government demand also appears to raise productivity and markups when they are measured using gross output. These results are inconsistent with standard neoclassical and New Keynesian models of government spending.
You can download a copy of the paper from the link above or on my Research page.