(Mis)Allocation Effects of an Overpaid Public Sector

Tiago Cavalcanti and Marcelo Rodrigues dos Santos

No 15173, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: There is a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are different for public and private employees. Such differences affect the occupational choice of agents and might generate some type of misallocation. We develop a life-cycle model with endogenous occupational choice and heterogeneous agents to study the implications of an overpaid public sector. The model is estimated to be consistent with micro and macro evidence for Brazil, a country with a high public sector earnings premium. Our counterfactual exercises demonstrate that public-private earnings premium can generate important allocation effects and sizeable productivity losses. For instance, a reform that would decrease the public-private wage premium from its benchmark value of $19\%$ to $15\%$ and would align the pension of public sector workers with the one in place for private sector workers could increase aggregate output by $11.2\%$ in the long-run without any decrease in the supply of public infrastructure. We provide a decomposition of the aggregate effect into changes in factors accumulation and changes in TFP and implement a welfare distributive analysis.

Keywords: Public private earnings premium; Misallocation; And development (search for similar items in EconPapers)
JEL-codes: E6 H3 J2 O1 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: (MIS)Allocation Effects of an Overpaid Public Sector (2021)
Working Paper: (Mis)Allocation Effects of an Overpaid Public Sector (2015)
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