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Public Wages, Public Employment, and Business Cycle Volatility: Evidence from U.S. Metro Areas

Claire A. Boeing-Reicher () and Vincenzo Caponi ()
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Claire A. Boeing-Reicher: Kiel Institute for the World Economy

No 9965, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Based on data from a cross section of U.S. metro areas, we show that public employment correlates negatively with business cycle volatility, hinting at a stabilizing effect of public employment, while public wages correlate weakly and positively with business cycle volatility, hinting at a destabilizing effect of public wages. To explain these relationships, we set up a search and matching model that contains a government sector and a role for government spending in product markets. This latter mechanism affects how the outside option behaves, and this mechanism can help a search and matching model to generate wage-reducing and stabilizing effects of public employment. Without this mechanism, a search and matching model cannot generate these effects.

Keywords: public employment; public wages; business cycle volatility; crowding out; search and matching (search for similar items in EconPapers)
JEL-codes: E32 E63 J21 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2016-05
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
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