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

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Can transfers to governments stimulate local economic activity in low-income areas? We investigate how government transfers affect local public expenditure, labor markets, and household welfare, exploiting resource windfalls that are driven by the redistribution of natural resource tax revenues among 1,600 non-extractive municipalities in Peru between 2006 and 2018. Our findings indicate positive impacts on the local economy, with increases in employment, both in the public and private sectors, earnings, household income, and formality. Individuals transition into wage employment and home production rather than remaining inactive. These effects are especially pronounced among rural households, women, and those with lower educational attainment. We find evidence of a multiplier effect, as the rise in employment and earnings is evident even in sectors that do not directly serve municipalities, and prices of non-tradables increase. We estimate a local fiscal multiplier, revealing that each additional dollar from these resource windfalls generates approximately two dollars in the local economy.