Public and Private Sector Employment and the Jobs Displacement Effects

Abstract

This chapter explores the jobs displacement shock effects of the interaction between public- and private-sector employment growth. Evidence indicates that private-sector employment growth declines following a positive shock to public-sector employment, consistent with the crowding-out effect. The wage premium and private-sector wage growth exacerbate the crowding-out of private sector employment following a positive public-sector employment shock. In addition, the private-sector wage channel is the most potent channel that exacerbates the crowding-out effects compared to the wage premium channel. This means that the private-sector wage increase compensates the wage paid in the public sector. This may be partly on account of costs minimization as the employers shed jobs. On the other hand, the tax revenue and budget balance channels worsen the crowding-out effect of private sector employment growth following a positive public-sector employment shock. This is because the increased public-sector employment increases the public-sector wage bill, which needs to be financed by increased tax revenue. GDP growth worsens the crowding-out of the private-sector employment growth shock following a positive public-sector employment shock. This is particularly the case in the high-inflation regime. The implication of the results is that the crowding-out effects depend on the inflation regimes. The high-inflation regime results in more pronounced crowding-out effects compared to those in the low-inflation regime.