Abstract
We investigate empirically the effect of government purchases on unemployment in 20 OECD countries, for the period 1980-2007. Compared to most earlier studies we use a more extensive data set, which allows for controlling for a host of factors that influence the effect of government purchases. We find that increased government purchases lead to lower unemployment; an increase equal to one percent of GDP reduces unemployment by about 0.3 percentage point in the same year. The effect is greater in downturns than in booms, and also greater under a fixed exchange rate regime than under a floating regime. The effect on unemployment reflects a corresponding positive effect of increased government purchases on the employment to population rate.