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Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 16.24

Dimitrios Bermperoglou  and Evi Pappa and Eugenia Vella


The Government Wage Bill and Private Activity

December, 2016

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. Aggregate public wage bill shocks induce typically insignifi…cant effects. Disaggregating by government level reveals 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 signifi…cant 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.

JEL Classification: C22, E12, E32, E62

Keywords: government wage bill, fi…scal multipliers, VARs, sign restrictions, DSGE model, search and matching frictions

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