This report covers "the job creation effect of government spending."
(Methodology) The effect on job creation by the government spending was analyzed for each industry by examining the impact from the differences in the content and structure of government spending. For this purpose, the Basic Coefficient Matrixes of Inter-industry Relations Table and its addendum Employment Table were analyzed by incorporating the factors of consumption, investment, and baseline multiplier effects to examine the employment triggering effect from the changes in fiscal distribution for each industry.
(Recent Employment Coefficient Trend) Since the start of the new millennium, the employment and hiring coefficients for all industries continue to decrease. Between 1990 and 2011, the biggest trigger came from consumption. While exports had a bigger effect on job creation than investment in the 1990s, investment has overtaken exports since 2000. Another characteristic is that government spending, rather than private spending, on investments had a bigger impact on the number of jobs, as did private consumption over government consumption.
(Recent Government Expenditure Status) Among the 28 major industry categories under the Inter-industry Relations Table, government spending was primarily focused on the top three industries of Construction, Public Administration & National Defense, and Education & Health. Over the last five years (2007 to 2011), these three sectors accounted for an average of 95.5% of government spending (Construction 22.8%, Public Administration & National Defense 40.2%, Education & Health 32.3%).
(Government Spending Allocation Scenarios) Six scenarios were assumed for the allocation of government spending of KRW 1 billion. (Baseline, Consumption-driven, Investment-driven, Construction-driven, Public Administration-driven, Education & Health-driven). The baseline, consumption-, and investment-driven scenarios are based on the annualized government spending allocations to industries over the past five years, on consumption, and on investment. Spending scenarios on Construction, Public Administration, and Education & Health use allocation models based on the spending only on construction, public administration and national defense, and education and health following the spending ratio on each sub-industry for the last five years.
(Results) The range of the job creation effect changed dramatically by the type of spending allocation model. Under the baseline model, the KRW 1 billion spending had the biggest job creation effect at 16.85 people with the education and health-driven allocation structure, while coming in relatively weaker at 11.76 people with the public administration-driven allocation structure. When considering the consumption multiplier effect, the spending scenarios had an additional job creation effect of 10.2 people (74.2%) on average when compared to the baseline multiplier model. When considering the investment multiplier effect, all scenarios recorded a higher job creation effect than from the baseline model but lower than the consumption multiplier model. When KRW 1 trillion of government spending was distributed by the six scenarios, a maximum of 27,660 jobs (consumption multiplier model with allocation focus on education and health) and a minimum of 10,890 jobs (baseline multiplier model with allocation focus on public administration) were created.
(Policy Implications) The job creation effect of government spending can vary dramatically not only by the policy content and structure, but also by the industries that receive the allocations. The bottom line: in order to maximize job creation, government spending should be structured to boost the total demand, so as to induce direct and indirect production ripple effects for related industries, and to activate private consumption and investment at the same time.
(Methodology) The effect on job creation by the government spending was analyzed for each industry by examining the impact from the differences in the content and structure of government spending. For this purpose, the Basic Coefficient Matrixes of Inter-industry Relations Table and its addendum Employment Table were analyzed by incorporating the factors of consumption, investment, and baseline multiplier effects to examine the employment triggering effect from the changes in fiscal distribution for each industry.
(Recent Employment Coefficient Trend) Since the start of the new millennium, the employment and hiring coefficients for all industries continue to decrease. Between 1990 and 2011, the biggest trigger came from consumption. While exports had a bigger effect on job creation than investment in the 1990s, investment has overtaken exports since 2000. Another characteristic is that government spending, rather than private spending, on investments had a bigger impact on the number of jobs, as did private consumption over government consumption.
(Recent Government Expenditure Status) Among the 28 major industry categories under the Inter-industry Relations Table, government spending was primarily focused on the top three industries of Construction, Public Administration & National Defense, and Education & Health. Over the last five years (2007 to 2011), these three sectors accounted for an average of 95.5% of government spending (Construction 22.8%, Public Administration & National Defense 40.2%, Education & Health 32.3%).
(Government Spending Allocation Scenarios) Six scenarios were assumed for the allocation of government spending of KRW 1 billion. (Baseline, Consumption-driven, Investment-driven, Construction-driven, Public Administration-driven, Education & Health-driven). The baseline, consumption-, and investment-driven scenarios are based on the annualized government spending allocations to industries over the past five years, on consumption, and on investment. Spending scenarios on Construction, Public Administration, and Education & Health use allocation models based on the spending only on construction, public administration and national defense, and education and health following the spending ratio on each sub-industry for the last five years.
(Results) The range of the job creation effect changed dramatically by the type of spending allocation model. Under the baseline model, the KRW 1 billion spending had the biggest job creation effect at 16.85 people with the education and health-driven allocation structure, while coming in relatively weaker at 11.76 people with the public administration-driven allocation structure. When considering the consumption multiplier effect, the spending scenarios had an additional job creation effect of 10.2 people (74.2%) on average when compared to the baseline multiplier model. When considering the investment multiplier effect, all scenarios recorded a higher job creation effect than from the baseline model but lower than the consumption multiplier model. When KRW 1 trillion of government spending was distributed by the six scenarios, a maximum of 27,660 jobs (consumption multiplier model with allocation focus on education and health) and a minimum of 10,890 jobs (baseline multiplier model with allocation focus on public administration) were created.
(Policy Implications) The job creation effect of government spending can vary dramatically not only by the policy content and structure, but also by the industries that receive the allocations. The bottom line: in order to maximize job creation, government spending should be structured to boost the total demand, so as to induce direct and indirect production ripple effects for related industries, and to activate private consumption and investment at the same time.