The 2009 Recovery Act: Stimulus at the Extensive and Intensive Labor Margins

Abstract

This paper (i) estimates the local effects of government stimulus spending on labor market outcomes and (ii) shows how these effects can be obtained from a firm's optimal policy in the presence of costs to hiring workers. We analyze the American Recovery and Reinvestment Act of 2009 (Recovery Act) using instrumental variables at the county-level. We find that $1 million of government spending increased employment locally by 5.5 persons and also increased wage payments to existing workers by $178,000. Next, we build a model in which a firm meets new government demand with a combination of new hiring and increasing the number of hours for existing workers. Faced with hiring costs and an overtime premium, the firm responds by increasing hours along both margins. Our analysis also provides insight into how government spending policy should be structured to lower the cost of generating new jobs. Finally, we catalog survey evidence from Recovery Act fund recipients that reinforces the importance of the intensive labor margin.