Life After Public Employment Retrenchment. Evidence from Italian Municipalities

We investigate the interaction between public and private employment at the local level. We start by presenting a spatial-equilibrium framework to discuss how the retrenchment of the public sector impacts on private jobs, population and house prices. We then provide evidence from Italian municipalities, using an IV strategy that exploits the fact that the contraction in public employment observed between the last two Censuses (2001-2011) was strongly influenced by the central government decisions, with little reference to the local economic conditions. Our results suggest that exogenous reductions in public employment stimulate the growth of private jobs, mostly in the tradable industries, and that the housing market represents a relevant channel for the interplay between the two sectors.