Working Paper: NBER ID: w15754
Authors: Christopher J. Nekarda; Valerie A. Ramey
Abstract: This paper investigates industry-level effects of government purchases in order to shed light on the transmission mechanism for government spending on the aggregate economy. We begin by highlighting the different theoretical predictions concerning the effects of government spending on industry labor market equilibrium. We then create a panel data set that matches output and labor variables to shifts in industry-specific government demand. The empirical results indicate that increases in government demand raise output and hours, but lower real product wages and productivity. Markups do not change as a result of government demand increases. The results are consistent with the neoclassical model of government spending, but they are not consistent with the New Keynesian model of the effects of government spending.
Keywords: government spending; labor market; productivity; neoclassical model; new Keynesian model
JEL Codes: E24; E31; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government Demand (H49) | Output (Y10) |
| Government Demand (H49) | Hours Worked (J22) |
| Government Demand (H49) | Real Product Wages (J39) |
| Government Demand (H49) | Productivity (O49) |