Is Public Expenditure Productive? Evidence from the Manufacturing Sector in U.S. Cities, 1880-1920

Abstract

This article provides the first examination of the relationship between public expenditures and labor productivity that focuses on municipalities, rather than states or nations. We use data for 1880-1920, a period of rapid industrialization in which there were both high levels of public infrastructure spending and rapid growth of productivity. We use a simple Cobb-Douglas production function to model labor productivity in the manufacturing sector, letting total factor productivity depend on “productive” public expenditure by city governments. Using a data set of 45 of the largest cities in the United States, we find no statistically significant relationship between “productive” public expenditure and labor productivity in the manufacturing sector during this period. These findings are robust to three different econometric approaches. We do however find a strongly positive and statistically significant relationship between private capital and labor productivity. Our results are consistent with those of much of the literature examining this same relationship in states and nations and they have important implications for contemporary public policy issues.

Keywords: public expenditure, productivity, cities

JEL Classification: E62, H54, H72, 047