Government employment and economic growth: evidence from China

This paper estimates the impact of government employment on regional economic growth in a large developing economy. Using city-level panel data from China, we identify the causal effect through a shift-share instrumental variable that interacts Revolutionary Base Area exposure with national general-purpose intergovernmental transfers. We find that expansions in the civil servant workforce significantly reduce GDP per capita growth. The estimates are robust to alternative variable definitions, sample restrictions, additional controls, and a wide range of specification choices. The effects are more pronounced in smaller and underdeveloped cities, as well as in regions with lower levels of marketization. Mechanism analysis is consistent with crowding-out effects: a higher share of the civil servant workforce is associated with weaker investment and innovative activity. These findings indicate that bureaucratic expansion can entail substantial growth costs in developing settings.