The Effect of Government Size on Economic Growth: Evidence from Gross State Product Data

Abstract

Using newly released data from the Bureau of Economic Analysis, this paper provides empirical estimates of the effect of government employment on gross state product. Cross-sectional data from 1982 are combined with a simple growth model to show that higher levels of government employment generally have a positive and significant effect on gross state product, with state and local employment levels having apparently greater influence. A first-differences variant of the model supports the cross-sectional findings. However, the positive influence of absolute government size may be offset by a negative relationship between GSP growth and the relative size of government.