Public Employment in a Task Based Theory of Underemployment (MF)

Tuesday 5 March 2019, 2.00PM to 3.00pm

Speaker(s): Pedro Gomes (Birkbeck College, University of London )

Host: Macro-Finance Cluster

Abstract: The public sector is the largest employer in both advanced and developing countries, and accounts for at least 15 percent of total employment. It hires more educated workers. To study public employment in a general equilibrium context, we present and solve a task based theory of underemployment. Alongside a competitive sector, a cost minimizing government hires people endowed with different tasks in order to produce a given amount of public spending. For a given wage policy in the public sector, our model highlights key channels to rationalize why public-sector employment is so biased towards educated workers. The first explanation is technological, in the sense that skilled workers are more important inputs in the production of government services. The second explanation refers to the public sector wage policy. If public sector wages are more compressed, the government will shift employment to more skilled workers, that are relatively cheaper. The last feature is related to underemployment and over-qualification. If wages for unskilled tasks in the public sector are high, it might attract more skilled workers. The equilibrium model is very parsimonious and can be calibrated to match key moments of the US public sector. We find that in the US economy the excess hiring of skilled in the public sector is mainly accounted for by technological consideration and underemployment, with limited role to public wage differential. In addition, we show that the public-sector wage policy is a crucial driver of private sector inequality, and 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 0.2 percent and lowers unskilled private wages by 0.1 percent. Using US data from the CPS, we focus on skill premia in different occupations and look at the differential of these wage premia between the public and private sector. We show that wage premia in the public sector is lower in occupations in which the public sector employs more skilled workers than the private sector. We take this result as direct evidence of underemployment in the public sector.

Location: ERC Seminar Room AD271

Admission: All welcome