Effects of Government Spending on Employment: Evidence from Winners and Runners-up in Procurement Auctions

Project Start:12/2016
Researchers:Klaus Gugler, Michael Weichselbaumer, Christine Zulehner
Category: Macro Finance
Funded by:LOEWE

To estimate demand for labor, we combine detailed employment data with the outcomes of procurement auctions and compare the employment of the winner of an auction with the employment of the second ranked firm (i.e. the runner-up firm). Assuming similar ex-ante winning probabilities for both firms, we may view winning an auction in a public procurement as an exogenous shock to a firm's production and its demand for labor. For the analysis, we utilize data from almost 900 firms that have been active in construction and 3000 auctions that have taken place in Austria in the time period 2006 until 2009. Our main results show that the winning firm significantly increases labor demand in the weeks following an auction. In the years before the recent economic crisis, it employs about 80 workers more two months after the auction than the runner-up firm. In the crisis, however, firms do not employ more workers than their competitors after winning an auction. We discuss explanations like labor hording for this result.