Government Employment Shocks, Policy Coordination, and Debt Structure

The labor market effects of government employment shocks in the United States have varied markedly across the postwar period. Using a Bayesian structural VAR with max-share identification, we document three distinct regimes: before the Volcker disinflation, public hiring crowded in private employment, raised real wages, and reduced unemployment; during the Great Moderation, the same shocks became contractionary; and after the Global Financial Crisis, their effects were largely muted. We account for these changes with a New Keynesian DSGE model featuring public employment, alternative monetary--fiscal regimes, and a maturity structure of government debt. The model shows that while monetary--fiscal coordination holds in both the pre-Volcker and post-GFC periods, debt maturity differs sharply across them. Longer debt maturity weakens fiscal transmission even under passive monetary policy, whereas aggressive anti‑inflationary policy renders government employment shocks contractionary regardless of debt maturity.