Do Public Investments Increase Employment in a Recession? Evidence from Germany

Lukas Buchheim and Martin Watzinger

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: In 2009, Germany invested 15.4 Billion Euro in infrastructure to avert the looming recession. In this study, we evaluate whether the German stimulus program was successful in limiting the impact of the crisis on the job market. We exploit exogenous cross-sectional variation to identify the casual effect of stimulus investment on the change in unemployment on the county level. By law, 65 percent of the stimulus funds were earmarked for the renovation of existing school buildings. Thus a large part of all investment was predetermined by the number and size of schools in a county which are plausibly exogenous to local economic conditions. Thus a large part of all investment was predetermined by the number and size of schools in a county which are plausibly exogenous to local economic conditions during the crisis. This opens up the possibility to use the number of schools and students as instrumental variables for stimulus investment. Our IV-estimates indicate that the stimulus program was successful in reducing the number of unemployed: On average, one job was created for every 44,000 Euro spent. This result is in line with estimates for the effectiveness of the US stimulus program. We validate our IV strategy with extensive falsification exercises and various robustness checks.

JEL-codes: E24 E62 H50 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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