The 2009 Recovery Act: Stimulus at the extensive and intensive labor margins

Abstract

This paper studies the effect of government stimulus spending on a novel aspect of the labor market: the differential impact of spending on the total wage bill versus employment. We analyze the 2009 Recovery Act via instrumental variables using a new instrument, the spending done by federal agencies that were not instructed to target funds towards harder hit regions. We find a moderate positive effect on jobs created/saved (i.e., the "extensive margin") and also a significant increase in wage payments to workers whose job status was safe without Recovery Act funds (i.e., the "intensive margin"). Our point estimates imply that roughly one-half of the wage payments resulting from the act were paid at the intensive margin. To provide a theoretical underpinning for the estimates, we build a micro-founded dynamic model in which a firm meets new government demand with a combination of new hiring and increasing existing workers' average hours. Faced with hiring costs and an overtime premium, the firm responds by increasing hours along both margins. Our model analysis also provides insight into how government spending policy should be structured to lower the cost of generating new jobs. Finally, we catalogue survey evidence from Recovery Act fund recipients that reinforces the importance of the intensive labor margin.

Regional Consumption Responses and the Aggregate Fiscal Multiplier

“…28 Beyond these minimums, which were already met by the regular annual award amounts, a slightly different 85/15 rule was used. Within each state, 85% of dollars were allocated to according to the share of school 25 Our discussion of the instrument here follows Dupor and Mehkari (2016), which uses the special education funding component of the act as an instrument to assess the effect on school districts' spending of the Recovery Act grants.…”

“…Other research on the ARRA using this narrative instrumental variable approach includesDupor and Mehkari (2016) andDupor and McCrory (2017). In Appendix B, we provide a detailed analysis of our…”

Ten Years After the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?

“…Most of the literature using cross-sectional estimates has used per capita estimates and has not weighted the estimates. However,Dupor and Mehkari (2016) started weighting the estimates and discovered that weighted estimates of the American Recovery and Reinvestment Act of 2009 are much lower than unweighted estimates.6 These three instruments are based on either Medicaid formulas alone, Department of Transportation formulas alone, or a combination of multiple agency formulas.…”

Regional Consumption Responses and the Aggregate Fiscal Multiplier

“…3 Our method requires a very detailed reading of the Act, federal codes, and regulations. Other research on the ARRA using this narrative instrumental variable approach includes Dupor and Mehkari (2016) and Dupor and McCrory (2017). 1 ernment.…”