Public investment and employment effects

Here is evidence of the employment impact of public investment programmes drawing on evidence from Germany.

Regions with high unemployment benefit more from local public investment activities than regions with low unemployment, though all regions benefit. This is the main finding of research by Lukas Buchheim, Martin Watzinger and Matthias Wilhelm, presented at the annual congress of the European Economic Association in Geneva in August 2016.

Their study focuses on Germany, where following the introduction of subsidies for investment in renewable energy, €60 billion went into the installation of photovoltaic systems between 2003 and 2012. Investment peaked at 0.6% of GDP.

The study supports the hypothesis that public spending is particularly effective in stimulating the economy when resources are idle: at the county level, the research shows that a €120,000 increase in investments in photovoltaic installations caused an increase in employment by one job for one year.

The findings indicate that public investments are particularly worthwhile in places where unemployment is usually high. The employment gains are at least twice as large in counties with structurally high unemployment compared with counties with structurally low unemployment.

By contrast, changes in unemployment within a county over time seem to have little impact on the effectiveness of investments in creating jobs.

The authors comment: ‘Investments may be a particularly effective stimulus tool in regions with high and persistent unemployment. Targeting the right regions at the right time is essential for cost-effective policy design.’