Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act (ARRA) of 2009 included 88 billion of aid to state governments administered through the Medicaid reimbursement process. We examine the effect of these transfers on states' employment. Because state fiscal relief outlays are endogenous to a state's economic environment, OLS results are biased downward. We address this problem by using a state's pre-recession Medicaid spending level to instrument for ARRA state fiscal relief. In our preferred specification, a state's receipt of a marginal 100, 000 in Medicaid outlays results in an additional 3. 8 job-years, 3. 2 of which are outside the government, health, and education sectors. (JEL H75, I18, I38, R23)