NCPA - National Center for Policy Analysis

Public Expenditure Fails to Improve Labor Productivity

February 20, 2013

The federal government and local municipalities often claim that public sector spending increases labor productivity. However, there is no relationship between public expenditure and labor market productivity, say Melissa Yeoh, an assistant professor of economics at Berry College, and Dean Stansel, an associate professor of economics at Florida Gulf Coast University.

  • Yeoh and Stansel use three econometric models to determine if there is a relationship between public expenditures and labor market productivity in the manufacturing sector.
  • While other studies have examined states or nations, this is the first study to examine municipal spending.
  • It uses a data set that includes information on 45 of the largest cities in the United States between 1880 and 1920.

The models account for public expenditure, private capital, year, city population, city size, real wages and ethnic fragmentation. Yeoh and Stansel also control for outliers in specific cases where the data does not fit in with overall averages for a particular city.

  • According to their multivariate regression, the authors report that they did not find a positive relationship between public expenditure and productivity.
  • Despite analyzing a period of rapid expansion in both public expenditure and productivity, Yeoh and Stansel's results show that higher levels of productive public expenditure by city governments have no statistically significant impact on labor productivity in the manufacturing sector.
  • For every public dollar spent, labor productivity did not rise by a certain amount.

The results are consistent with other findings and have important implications for policymakers when considering contemporary policy issues.

  • Between 2007 and 2012, U.S. federal spending grew by more than $1 trillion as an attempt to improve economic conditions.
  • Yeoh and Stansel's results suggest that spending on infrastructure projects at the state and local level, along with other public expenditures, fail to produce the desired benefits.
  • The authors say an effective strategy for municipalities to revive their local economy would be to keep tax burdens low.

Source: Melissa Yeoh and Dean Stansel, "Is Public Expenditure Productive? Evidence from the Manufacturing Sector in U.S. Cities, 1880-1920," Cato Journal, Winter 2013.


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