Cyclical Effects of Government's Employment and Goods Purchases

Distinguishing between the goods purchase and employee compensation components of government spending is important. Shocks to government goods purchases and shocks to government employment, have the opposite effects on private output, private employment, and private investment. Moreover, with this distinction in place, quantitative analysis reveals that government spending is no longer a significant driving source of the U.S. business cycle. On the contrary, the components of government spending are procyclical in the U.S. data primarily because of their positive responses to the output fluctuations generated by technology shocks.