The government wage bill and private activity

Abstract

We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. We find that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private sector employment. Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce significant contractionary effects. In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity.