Abstract
Expansion of direct job creation programs in the public sector was one of the major components of the 1977 Economic Stimulus Package in the United States. The Public Service Employment program (PSE), which has been in operation since 1974, provided the means for this relatively quick expansion. PSE, established under title II and VI of the Comprehensive Employment and Training Act (CETA), grants federal money to state and local governments to create public sector jobs that would not have been created in the absence of the program. To the extent that state and local governments substitute these PSE funds for their regular wage bill expenditures, the counter‐cyclical capacities of the program are reduced. In the extreme case of complete substitution, the macroeconomic impact of PSE will approach that of other non‐employment federal grant programs since the funds that are released by substitution must eventually be used elsewhere.
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