Measuring the Human Capital Intensity of Government Spending and its Impact on Economic Growth in a Cross Section of Countries

This paper contradicts previous findings of a lack of relationship between government spending and long run economic growth. The paper argues that government spending has several opposing effects on growth. I focus on one of these, ‘relative wage effects,’ involving the human capital intensity of government spending. The paper constructs two rough measures of this variable for a diverse cross‐section of countries, and uses them to disentangle relative wage effects from other effects of government spending. The paper finds that, after netting out relative wage effects, government spending is positively correlated with growth across countries. Furthermore, as the theory predicts, relative wage effects appear to be empirically important in countries where (a) government spending comprises a sufficiently large share of aggregate spending, and (b) government spending is particularly human capital‐intensive.