The Relationship Between Public Sector Employment and GDP is Not Well Understood

by Reihan Salam

We often hear that GDP would grow considerably if we just stepped up public sector hiring, and that is absolutely true. But this doesn’t necessarily mean what advocates of more public sector hiring think it means, as Garett Jones explains:

Hiring a worker who (through no fault of her own) accomplishes absolutely nothing raises GDP if the government does the hiring.  Hiring a worker who (through no fault of her own) accomplishes absolutely nothing does nothing to GDP if the private sector does the hiring.  

Why? Because GDP counts government salaries as “government expenditures” as soon as the government hires a person.  But the “consumption” and “investment” parts of GDP only count genuine purchases by the private sector (leaving the oddities of imputed spending for the coda below).  

So if a private sector product spends years in the incubator, burning through thousands of person-hours of work and millions of dollars of salary–but never sees the light of day–then the product never shows up in GDP.  But if thegovernment had hired those same workers who worked just as long on a similarly fruitless project, their labor would give a big boost to GDP. 

Government hiring creates GDP by definition.  Private hiring only creates GDP if the worker actually creates a product.  

Now rewind and replay every debate we’ve had about public sector hiring for the past half-decade.

I should stress that very few public sector workers accomplish “absolutely nothing,” but I think it is reasonable to suggest that some workers are more productive than others, as is the case in the private sector, and that productivity levels aren’t necessarily perfectly captured by compensation levels, in either domain. It just happens that this fact has different implications in the public vs. the private sector as a matter of GDP accounting. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.