Abstract
ABSTRACTThe regional distribution of public employment: theory and evidence. Regional Studies. This article analyzes the optimal regional pattern of public employment in an information-constrained second-best redistribution policy. It shows that regionally differentiated public employment can serve as an expenditure side-tagging device, bypassing or relaxing the equity-efficiency trade-off. The optimal pattern exhibits higher levels of public employment in low-productivity regions and is more pronounced the higher is the degree of regional inequality. Empirically, using a panel of European regions from 1995 to 2007, the analysis finds evidence that public employment is systematically higher in low-productivity regions. The latter effect is stronger in countries with higher levels of regional inequality.
Highlights
Governments can regionally differentiate their policies along several dimensions
Our findings indicate that public employment is significantly higher in low productivity regions and that this relationship is more pronounced in countries with higher degrees of regional inequality
Public employment can serve as an expenditure side tagging device to improve the efficiency of tax-transfer schemes
Summary
Governments can regionally differentiate their policies along several dimensions. One important dimension is the regional differentiation of public employment, which can give rise to a critical equity-efficiency tradeoff. Alesina et al (2001) document the regional differences in public employment in Italy They show that these differences generate substantial redistributive effects and point out the associated efficiency costs due to an inter-regionally inefficient allocation of publicly provided goods and services, or due to detrimental productivity effects of a bloated public sector. Such findings raise the question whether regionally differentiated public employment is an appropriate redistributive instrument, and whether it is possible to characterize the inherent equity-efficiency trade-off of such a policy. The potential role of public employment for efficient redistribution has originally been addressed by Wilson (1982) He uses a framework of optimal linear taxation and studies whether the public sector should alter the composition of its workforce in favor of high or low-skilled individuals. De la Fuente (2004) studies regionally differentiated policies as instruments of a second-best redistribution policy, but he focusses on investment.[1]
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