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.