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Public sector employment and aggregate fluctuations

Luis G. Bettoni and Marcelo R. Santos

Journal of Macroeconomics, 2022, vol. 72, issue C

Abstract: An important stylized fact about public sector employment is that it predominantly hires skilled and more experienced workers. In this paper, we consider a search and matching model with public sector and on-the-job human capital accumulation that incorporates this stylized fact to study how the public sector employment affects the labor market volatility. In the model, public sector employment affects aggregate fluctuations by changing the composition of workers employed in the private sector. Because workers accumulate human capital and become more productive when employed, the flow of benefits from forming a match are spread over time. In this environment, if the flow into the public sector increases with human capital, then the government hiring policy decreases the firm’s benefit of hiring and the matching surplus, increasing the responsiveness of labor market tightness to shocks. We calibrate the model for the Brazilian economy and show that this mechanism amplifies the effects of public employment on vacancy creation and private sector employment volatility.

Keywords: Public sector employment; Aggregate fluctuations (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 J21 J45 J64 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jmacro.2022.103418

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