Public Employment Redux

Pietro Garibaldi, Pedro Gomes and Thepthida Sopraseuth

No 14321, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The public sector hires disproportionately more educated workers. Using US microdata, we show that the education bias also holds within industries and in two thirds of 3-digit occupations. To rationalize this finding, we propose a model of private and public employment based on two features. First, alongside a perfectly competitive private sector, a cost-minimizing government acts with a wage schedule that does not equate supply and demand. Second, our economy features heterogeneity across individuals and jobs, and a simple sorting mechanism that generates underemployment -- educated workers performing unskilled jobs. The equilibrium model is parsimonious and is calibrated to match key moments of the US public and private sectors. 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. A 1 percent increase in unskilled public wages raises skilled private wages by 0.07 percent and lowers unskilled private wages by 0.06 percent.

Keywords: Public-sector employment; Public-sector wage; Underemployment; Education (search for similar items in EconPapers)
JEL-codes: E24 J20 J24 J31 J45 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Public employment redux (2021)
Working Paper: Public Employment Redux (2019)
Working Paper: Public Employment Redux (2019)
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