This paper analyzes the role of the composition of public consumption in a non-scale R&D based growth model by drawing a distinction between two broad categories of current government spending: final good purchases and public employee compensations. The composition of government expenditure plays a crucial role because changes in the goods and the employment components have different effects on an economy's long run performance. Unlike an increase in government spending in final goods, an increase in public employment reallocates labor away from the private sector with a negative effect on per capita output, research effort and innovation.
In addition, for given level of public expenditure a change in its composition affects the steady-state allocation of resources and influences the economy's transitional dynamics by varying the speed of convergence towards the steady state.