Stimulus Crowd-out

Government spending and jobs

What happens to private-sector employment when public-sector employment goes up? A new working paper from researchers at the International Monetary Fund (IMF) suggests that public-sector gains around the globe become private-sector losses. IMF analysts Alberto Behar and Junghwan Mok looked at data for 194 developing and advanced countries from 1988 to 2011 and found "robust evidence that public employment crowds out private employment."

Over all, the researchers find, one private job is lost for every public job gained. "A public job typically comes at the cost of a private sector job," they write, "and therefore does not reduce overall unemployment." The authors note that previous studies limited to advanced economies found similar "full crowding out."

These results have potential implications for stimulus programs such as the 2009 American Recovery and Reinvestment Act. Studies looking at the U.S. experience have found that virtually all of the reduction in unemployment associated with increased public spending comes through increased government employment rather than private employment. The IMF paper adds credence to other research concluding that the 2009 stimulus plan created or saved hundreds of thousands of public-sector jobs at the expense of an even greater number of jobs in the private sector.