Local Government Spending and Employment : Regression Discontinuity Evidence from Brazil

This paper examines the causal effect of local government spending on labor markets in a developing country. We use plausibly exogenous variation in the allocation mechanism of federal funds at the municipality level in Brazil to estimate the effect of general spending on formal employment. We estimate that an additional 1% of spending at the local level (roughly $72,600) translates to an increase of about 20 formal jobs. This effect is much larger than other employment multipliers estimated in developed countries. We find that the size of the effect is driven by increases in employment from unskilled labor in the private sector, indicating that the transfer of federal funds can have a redistributive effect on the labor market, even if no such policy goal is explicitly stated