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The 2009 recovery act: stimulus at the extensive and intensive labor margins

Bill Dupor () and M. Saif Mehkari ()

No 2014-23, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: fiscal policy; intensive and extensive labor margins; the 2009 Recovery Act. (search for similar items in EconPapers)
JEL-codes: D21 D24 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab, nep-lma, nep-mac and nep-pbe
Date: 2014-08-11, Revised 2016-01-15
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Journal Article: The 2009 Recovery Act: Stimulus at the extensive and intensive labor margins (2016) Downloads
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