Do Government Purchases Affect Unemployment?

Steinar Holden & Victoria Sparrman

Photo: The Scandinavian Journal of Economics

Published in:

The Scandinavian Journal of Economics, Volume 120, Issue 1, July 2018.

DOI: 10.1111/sjoe.12214

Abstract

We estimate the effect of government purchases on unemployment in 20 OECD countries, for the period 1980–2007. An increase in government purchases, equal to 1 percent of GDP, is found to reduce unemployment by about 0.3 percentage points in the same year. The effect is greater and more persistent under less “employment‐friendly” labour‐market institutions, and it is greater and more persistent under a fixed exchange rate regime than under a floating regime. The effect is also greater in downturns than in booms. The effect on unemployment reflects a corresponding positive effect of increased government purchases on the employment‐to‐population rate.

Published Oct. 23, 2018 3:27 PM - Last modified Oct. 23, 2018 3:28 PM