Is There a Link Between Highway Funding, Construction Costs and Employment?
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Is There a Link Between Highway Funding, Construction Costs and Employment?

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    The challenges facing the U.S. highway system are immense. First, there has been a marked deterioration in the existing infrastructure due to delayed maintenance. Second, transportation demands are much greater than before and the cost of congestion has increased accordingly. Third, the economic crisis has led to large budget deficits, and despite the recent burst of stimulus-related budget increases, the prognosis for future funding is uncertain. Perhaps at no other time since the inception of the interstate system has there been such a keen interest to maximize the effectiveness of government highway spending. This study contributes to this interest by examining the relationship between government highway expenditures and construction costs. If, for example, an increase in government highway spending leads to an increase in construction costs, will this diminish the effectiveness of the sp infrastructure? Knowledge of the spending-cost relationship can assist policy makers with the design and implementation of capital and maintenance programs. In the current economic environment, an additional interest is in quantifying how effective highway spending is at creating employment. Estimates of that relationship are included herein. This research estimated the relationship between government spending on highways and construction costs using state-level panel data across the fifty states and the District of Columbia from 1980-2006. While controlling for local economic conditions and state and year fixed effects, it was found that a 1 % increase in highway expenditures is associated with at most a 0.10% increase in highway construction costs. The data indicate that the principal influences on construction costs are factors related to the general state of the economy. Examination of state-level data on individual construction inputs – excavation, asphalt, steel and concrete – provided even weaker evidence that highway expenditures affect construction costs. However, national-level data from 1972-2006 provide stronger indications that highway expenditures affect construction costs, particularly in markets for asphalt, steel and concrete. The difference in state-level and national-level results might be attributed to several factors: data quality, sample size or the existence of substantial spillovers. In regard to employment, this research estimated that a 1% increase in expenditures is associated with between a 0.12 and 0.18 % increase in construction industry employment.
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