Employment and Public Capital in Spain

This paper analyses the e¤ects on employment of increasing the stock of public capital. To this end, we derive a wage equation so that wages are endogenized. This allows us to show that, by means of a higher elasticity of labour demand with respect to wages, a rise in public capital increases employment. The estimation of a structural model for the Spanish private sector tests and con…rms empirically this relationship. The results show that an increase in public capital has a significant and positive direct influence on employment, and indirect e¤ects derived from lower wages and higher economic growth. Finally, we undertake a simulation exercise to assess the long run efects on employment and economic growth of increasing public capital.