Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act

This paper estimates the “jobs multiplier” of fiscal spending using the state-level allocations of federal stimulus funds from the 2009 American Recovery and Reinvestment Act (ARRA). Specifically, I estimate the relationship between state-level federal ARRA spending and the change in states’ employment outcomes from the time the Act was passed (February 2009) to some later month (through June 2010). Because the allocation of stimulus spending across states may be endogenous with respect to state economic outcomes, I instrument for stimulus spending using exogenous formula-driven cost estimates made by the Wall Street Journal and the Center for American Progress around the time that the ARRA was passed. To control for the counterfactual – what would have happened without the stimulus – I include several variables likely to be strong predictors of state employment growth. The results point to substantial heterogeneity in the impact of ARRA spending over time, across sectors, and across types of spending. The estimated jobs multiplier for total nonfarm employment is large and statistically significant for ARRA spending through March 2010, but falls considerably and is statistically insignificant beyond March. The implied number of jobs created or saved by the spending is about 2.0 million as of March, but drops to 0.8 million as of June. Across sectors, the estimated impact of ARRA spending on construction employment is especially large, implying a 23% increase in employment (as of June 2010) relative to what it would have been without the ARRA. Lastly, I find that spending on infrastructure and other general purposes has a large positive impact, while aid to state government to support Medicaid may actually reduce state and local government employment.