Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes

Abstract

Factor supply increases (depresses) output for many of the same reasons that the government spending multiplier might be less (greater) than one. Data from three 2008-9 recession episodes—the labor supply shifts associated with the seasonal cycle, the 2009 federal minimum wage hike, and the collapse of residential construction spending—clearly show that markets absorb an increased supply of factors of production by increasing output. The findings contradict the “paradox of toil” and suggest that government purchases and marginal tax rates reduce private consumption, even during the recession.