The impact of fiscal stimulus on employment: Evidence from China’s four-trillion RMB package

Abstract

Despite the large body of work re-estimating the impact of fiscal stimulus on employment in developed countries by using cross-sectional analysis, little evidence exists for China in this fashion. Adopting a sample of China’s 318 prefecture-level data between 2008 and 2010, I implement Bartik instrumental variable method inspired by China’s “four-trillion package” to estimate the causal effect of local fiscal spending on employment in China during recession. My findings reveal that every 100,000 CNY creates 2.2 to 3.4 jobs, implying 29,411 to 45,454 CNY (4,237 to 6,549 in USD) cost per job-year saved. These costs are lower than those estimated for Australia, Brazil and Germany. I further investigate the mechanism and find that employment growth primarily concentrated in the private sector is driven by the influx of migrants. However, the overall benefit–cost ratio is low, with no evidence of long-term effects and spillover effects to neighboring cities.