Abstract
In this paper we investigate the determinants of municipal labour demand in Sweden 1988–1995. Utilising a major grant reform in 1993, through which a switch from mainly targeted to mainly general central government grants occurred, we are able to identify which type of grants that have the largest effects on municipal employment. We find a larger municipal employment elasticity with respect to grants before the reform, which we interpret as evidence that general grants have less employment effects than specific ones. We further find a short run wage elasticity of approximately −0.5 and a long run ditto of approximately −0.9, and a quite sluggish adjustment process: only 60% of the desired change in municipal employment is implemented in the first year.
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