Size and composition of public investment, sectoral composition and growth*

•Public expenditure affects the sectoral composition of employment.•The growth rate depends on government intervention both directly and through the sectoral composition of employment.•One-sector models of public induced growth predict larger growth rates than a two-sector model.•The growth maximizing size and composition of public expenditure differ between one-sector models and a two-sector model.

After providing some descriptive evidence on the relationship between the size and composition of public expenditure and the sectoral employment composition of the economy, this paper develops an endogenous growth model with two private sectors, where the government provides, as pure public goods, both infrastructure investment, directly affecting the productivity of private capital in the 'modern' sector, and a flow of goods and services, enhancing the productivity of the otherwise labour-intensive 'traditional' sector. Government productive expenditure affects the long-run growth rate through its size and composition, both directly, by enhancing the productivity of private factors, and indirectly, by changing the employment sectoral composition of the economy.