Macroeconomic effects of shocks to public employment

The paper discusses the short-run relation between public and private employment. Empirical evidence is presented suggesting that in aggregate US time series, increases in government employment appear to generate temporarily positive responses of private employment and real output. Unlike in the case of shocks to government spending on goods, this contradicts the predictions of business cycle models based on the neoclassical growth model. It is explored in how far a model which includes the production of useful public services can potentially explain the qualitative properties of the evidence. (C) 2008 Elsevier Inc. All rights reserved.