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Does State Fiscal Relief during Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act

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  • Gabriel Chodorow-Reich
  • Laura Feiveson
  • Zachary Liscow
  • William Gui Woolston
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    Abstract

    The American Recovery and Reinvestment Act (ARRA) of 2009 included $88 billion of aid to state governments administered through the Medicaid reimbursement process. We examine the effect of these transfers on states' employment. Because state fiscal relief outlays are endogenous to a state's economic environment, OLS results are biased downward. We address this problem by using a state's prerecession Medicaid spending level to instrument for ARRA state fiscal relief. In our preferred specification, a state's receipt of a marginal $100,000 in Medicaid outlays results in an additional 3.8 job-years, 3.2 of which are outside the government, health, and education sectors. (JEL H75, I18, I38, R23)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

    Volume (Year): 4 (2012)
    Issue (Month): 3 (August)
    Pages: 118-45

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    Handle: RePEc:aea:aejpol:v:4:y:2012:i:3:p:118-45

    Note: DOI: 10.1257/pol.4.3.118
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    1. Todd C. Neumann & Price V. Fishback & Shawn Kantor, 2007. "The Dynamics of Relief Spending and the Private Urban Labor Market During the New Deal," NBER Working Papers 13692, National Bureau of Economic Research, Inc.
    2. Jeffrey Clemens & Stephen Miran, 2012. "Fiscal Policy Multipliers on Subnational Government Spending," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 46-68, May.
    3. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," Working Papers 136, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
    4. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
    5. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle, December.
    6. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
    7. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
    8. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    9. Claudia R. Sahm & Matthew D. Shapiro & Joel B. Slemrod, 2009. "Household Response to the 2008 Tax Rebate: Survey Evidence and Aggregate Implications," NBER Working Papers 15421, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Carlino, Gerald A. & Inman, Robert P., 2014. "Macro fiscal policy in economic unions: states as agents," Working Papers 14-20, Federal Reserve Bank of Philadelphia.
    2. Jeffrey Clemens & David M. Cutler, 2013. "Who Pays for Public Employee Health Costs?," NBER Working Papers 19574, National Bureau of Economic Research, Inc.
    3. Sommers, Benjamin D. & Oellerich, Donald, 2013. "The poverty-reducing effect of Medicaid," Journal of Health Economics, Elsevier, vol. 32(5), pages 816-832.
    4. Daniel Shoag, 2013. "Using State Pension Shocks to Estimate Fiscal Multipliers since the Great Recession," American Economic Review, American Economic Association, vol. 103(3), pages 121-24, May.
    5. Ando, Michihito, 2013. "How Much Should We Trust Regression-Kink-Design Estimates?," Working Paper Series 2013:22, Uppsala University, Department of Economics.
    6. Blomquist , Johan & Nordin, Martin, 2013. "Do the CAP Subsidies Increase Employment in Sweden? Estimating the Open Economy Relative Multiplier Using an Exogenous Change in the CAP," Working Papers 2013:41, Lund University, Department of Economics.
    7. Sylvain Leduc & Daniel Wilson, 2013. "Are state governments roadblocks to federal stimulus? Evidence from highway grants in the 2009 Recovery Act," Working Paper Series 2013-16, Federal Reserve Bank of San Francisco.
    8. Christina D. Romer & David H. Romer, 2014. "Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Changes, 1952-1991," NBER Working Papers 20087, National Bureau of Economic Research, Inc.

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