Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes
Factor supply increases (depresses) output for many of the same reasons that the government spending multiplier might be less (greater) than one. Data from three 2008-9 recession episodes - the labor supply shifts associated with the seasonal cycle, the 2009 federal minimum wage hike, and the collapse of residential construction spending - clearly show that markets absorb an increased supply of factors of production by increasing output. The findings contradict the "paradox of toil" and suggest that the government spending multiplier is less than one, even during the recession.
I appreciate comments by Gary Becker, Jeff Miron, Kevin Murphy, and Rob Shimer. I will provide updates on this work on my blog www.panic2008.net. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Mulligan Casey B, 2011. "Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-47, June. citation courtesy of