Measuring the Human Capital Intensity of Government Spending and its Impact on Economic Growth in a Cross Section of Countries

Abstract

This paper contradicts previous findings of a lack of relationship between government spending and long run economic growth. The paper argues that government spending has several opposing effects on growth. I focus on one of these, ‘relative wage effects,’ involving the human capital intensity of government spending. The paper constructs two rough measures of this variable for a diverse cross‐section of countries, and uses them to disentangle relative wage effects from other effects of government spending. The paper finds that, after netting out relative wage effects, government spending is positively correlated with growth across countries. Furthermore, as the theory predicts, relative wage effects appear to be empirically important in countries where (a) government spending comprises a sufficiently large share of aggregate spending, and (b) government spending is particularly human capital‐intensive.

Does Government Size Affect Per‐Capita Income Growth? A Hierarchical Meta‐Regression Analysis

“…The within‐study coefficients of variation are between 0.1 (Adam & Bevan, ; in Table ; Barro, , in Table ) and 5.9 (Neycheva, ; in Table ) or as high as 11.7 (Mendoza et al ., ; in Table ). Between‐study variation is also high, ranging from −0.65 (Saunders, ) to +0.44 (Butkiewicz & Yanikkaya, ) in the case of total government expenditure in Table ; and from −0.65 (Barro, ) to +0.18 (Cronovich, ) in the case of government consumption in Table . These variations reduce the reliability of the inference derived from summary measures even if the latter are free of publication selection bias.…”