Interesting Data on Increasing Public Employment

by Veronique de Rugy

As you may recall, since the adoption of the Recovery Act, the private sector has shed 2.5 million jobs and the federal government gained 416,000 jobs. Also, based on the Recovery.gov data, we see that four out of every five jobs created or saved (all the data available here) were in the public sector.

Recovery Act money is stimulating government employment. But why is this so bad?

In this paper, published in Economic Policy Journal, economists Yann Algan, Pierre Cahuc, and Andre Zylberberg looked at the impact of public employment on overall labor-market performance. The authors use data for a sample of OECD countries from 1960 to 2000, and they find that, on average, the creation of 100 public jobs eliminated about 150 private-sector jobs, decreased overall labor-market participation slightly, and increased by about 33 the number of unemployed workers.

Their explanation is that public employment crowds out private employment and increases overall unemployment by offering comparatively attractive working conditions. Basically, public jobs that offer higher wages, require low effort, and offer attractive fringe benefits attract many workers and crowd out private jobs. This is especially true when the public jobs exist in the private sector (transportation and education, for instance). The impact is bigger when these new employees are paid with new taxes.

The bottom line is that it is possible that, by increasing public employment, the stimulus money is further hurting private jobs.