Resource windfalls, public expenditure and labour markets: Evidence from municipalities in Peru

Abstract

Can public expenditures spur local economic activity in low-income regions? We exploit plausibly exogenous variation in municipality budgets in Peru between 2006 and 2018 —driven by the redistribution of natural resource tax revenues among more than 1,600 non-extractive municipalities— to explore the effects of public spending on local labor markets. We find positive effects on the local economy, as employment, wage work, earnings, household income, and formality increase. Moreover, these effects are particularly pronounced among women and individuals with lower levels of education. We estimate a local fiscal multiplier and find that each additional dollar spent per year generates around two dollars in the local economy.