Public employment and wages

With Andri Chassamboulli

We set up a search and matching model with a private and a public sector to understand the effects of employment and wage policies in the public sector on unemployment and education decisions. The effects on the educational composition of the labor force depend crucially on the structure of the labor market. An increase of skilled public-sector wages has a small positive impact on educational composition and larger negative impact on the private employment of skilled workers, if the two sectors are segmented. If there are movements across the two sectors, it has large positive impacts on education and on skilled private employment. We highlight the usefulness of the model for policymakers by calculating the value of public-sector job security for skilled and unskilled workers.

JEL Classification: E24; J31; J45; J64.

Keywords: Public-sector employment; public-sector wages; unemployment; skilled workers; education decision; public-sector job security premium.

With Andrea Camilli

Using micro data from the Italian Survey on Household Income and Wealth, we examine a previous undocumented dimension in which outcomes between public- and private-sector workers differ: homeownership. We show that public employees are more often homeowners than private employees are, and that this difference has widened after the Great Recession. We disentangle the effect of workers’ characteristics from the role of publicsector jobs characteristics, such as higher wages or job security, on homeownership differences across sectors. We find that demographic characteristics are important in explaining the historical difference, but cannot explain the widening gap across sectors. The higher job security, reflected in higher share of permanent contracts in the public sector in Italy, explains most of the divergence among sectors after the Great Recession. Part of the mechanism works through the financial system, with permanent contracts workers being less likely to be refused a loan.

JEL Classification: E24, J45, R21.

Keywords: Public employment, homeownership, income risk, wage gap.

With Pietro Garibaldi and Thepthida Sopraseuth

The public sector hires disproportionately more educated workers. To rationalize this finding, we propose a model of private and public employment with a perfectly competitive private sector, and exogenous public wages. Our also economy features heterogeneity across individuals and jobs, and a simple sorting mechanism that generates underemployment – educated workers performing unskilled jobs. We find that the public-sector wage differential and excess underemployment account for 15 percent of the education bias, with the remaining accounted for by technology. In a counterintuitive fashion, we find that more wage compression in the public sector raises inequality in the private sector.

JEL Classification: E24; E62l; J20; J24; J31; J45.

Keywords: Public-sector employment; public-sector wages; underemployment; education.

With Andri Chassamboulli

We set up a model with search and matching frictions to understand the effects of employment and wage policies, as well as nepotism in hiring in the public sector, on unemployment and rent seeking. Conditional on inefficiently high public-sector wages, more nepotism in public-sector hiring lowers the unemployment rate because it limits the size of queues for public-sector jobs. Wage and employment policies impose an endogenous constraint on the number of workers the government can hire through connections.

JEL Classification: E24; J31; J45; J64.

Keywords: Public-sector employment; nepotism; public-sector wages; unemployment; queues.

With Andri Chassamboulli and Idriss Fontaine

With Idriss Fontaine, Ismael Galvez-Iniesta and David Vila-Martin

We measure the size of gross worker flows between public and private sector and their importance for the dynamics of public employment over the last two decades in the US, UK, France and Spain. Between 10 and 35 percent of all inflows and outflows of the public sector are from and to private employment. These flows only account for 7 to 25 percent of the fluctuations of public employment.

JEL Classification: E24; E32; J21; J45; J60.

Keywords: Worker gross flows; job-to-job flows; public employment.

A model with search and matching frictions and heterogeneous workers was established to evaluate a reform of the public sector wage policy in steady-state. The model was calibrated to the UK economy based on Labour Force Survey data. A review of the pay received by all public sector workers to align the distribution of wages with the private sector reduces steady-state unemployment by 1.9 percentage points.

JEL Classification: E24; E32; E62; J45.

Keywords: Public sector employment; public sector wages; public sector wage premium, unemployment; skilled workers; worker heterogeneity.

With Zoë Kuehn

Countries with a lower fraction of workers with secondary education have smaller firms. We set up a model of occupational choice where individuals have primary, secondary or tertiary education. A more educated work force raises firm size and productivity. More educated workers earn higher wages, and hence among educated individuals only the more able become entrepreneurs. We find that within the framework of our model, different educational attainments can explain one third of the difference in average firm size between the US and Mexico. While improved educational attainments hence imply an increase in firm size over time, a fall in the price of capital together with capital-skill complementarity acts in the opposite direction, something that can explain a relatively constant average firm size in the US since the late 1970’s. Our policy experiments highlight additional effects of public employment and a skill bias in public hiring on firm size and productivity.

JEL Classification: J24, J45, E24, H30, O11.

Keywords: firm size, educational attainment, entrepreneurship, college premium, high school premium, public employment.

Awarded the Austin Robinson Memorial Prize for the best paper published in the Economic Journal in 2015 by an author who is within five years of receiving their PhD. 

I build a dynamic stochastic general equilibrium model with search and matching frictions in order to determine the optimal public sector wage policy. Public sector wages are crucial to achieve efficient allocation of jobs. High wages induce too many unemployed to queue for public sector jobs, in turn raising unemployment. The optimal wage depends on the frictions in the two sectors. Following technology shocks, public sector wages should be procyclical, and deviations from the optimal policy significantly increase the volatility of unemployment.

JEL Classification: E24; E32; E62; J45.

Keywords: Public sector employment; public sector wages; unemployment; skilled workers; fiscal rules.

With Antonio Afonso

We examine the interactions between public and private sector wages per employee in OECD countries. The growth of public sector wages and of public sector employment positively affects the growth of private sector wages. Moreover, total factor productivity, the unemployment rate and the degree of urbanisation are also important determinants of private sector wage growth. With respect to public sector wage growth, we find that it is influenced by fiscal conditions in addition to private sector wages. We then set up a dynamic labour market equilibrium model with two sectors, search and matching frictions and exogenous growth to understand the transmission mechanisms of fiscal policy. The model is quantitative consistent with the main estimation findings.

JEL Classification: E24; E62; H50.

Keywords: public sector wages; private sector wages; employment; fiscal policy.