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    • COVID-19 Business Impact Center
      COVID-19 Business Impact Center
      State and Local Government Employment in the COVID-19 Crisis
      15 Sep 2020Working Paper Summaries

      State and Local Government Employment in the COVID-19 Crisis

      by Daniel Green and Erik Loualiche
      The COVID-19 crisis has had large impacts on local economies and government budgets. Balanced budget requirements, not mis-management, have generated a fiscal crisis and forced state and local governments to reduce service provision precisely when it is in greatest demand.
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      Author Abstract

      Local governments are facing large losses in revenues and increased expenditures because of the COVID-19 crisis. We document a causal relationship between fiscal pressures induced by COVID-19 and the layoffs of state and local government workers. States that depend more on sales tax as a source of revenue laid off significantly more workers than other states. The CARES Act's provision of $150 billion in aid to state and local governments reduced the fiscal pressures they faced. Exploiting a kink in the formula for allocation of funding across states, we estimate a state and local government employment multiplier for federal aid—each dollar of federal aid was used by states to support 31 cents of payrolls. State rainy day fund balances limit the sensitivity of employment to both revenue shocks, revealing that balanced budget requirements for state and local governments increase the procyclicality of public service provision.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: August 2020
      • HBS Working Paper Number: HBS Working Paper #21-023
      • Faculty Unit(s): Finance
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      Daniel W. Green
      Daniel W. Green
      Assistant Professor of Business Administration
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