Government Employment and Wages and Labor Market Performance

Government wage, benefit, and employment decisions are not taken on a profit-maximizing basis and have a substantial impact on aggregate labor market performance and unemployment. In a two-sector labor market model with free mobility of labor, an increase in government wages or benefits reduces private sector employment, and government employment is not an effective counter-cyclical instrument. Empirical tests for Greece confirm that the expansion of the public sector in the 1980s contributed to the deterioration of labor market performance.
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Volume/Issue: Volume 1999 Issue 055
Publication date: April 1999
ISBN: 9781451847604
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Business and Economics , Labor , WP , private sector , labor market , wage differential , Unemployment , wage differentials , public sector labor markets , private sector employer , labor market performance , populist tendency , government policy , equilibrium condition , private sector employment , employment decision , production function , government hiring , government act , reaction function , government sector Lg , Labor markets , Wages , Employment , Public employment , Europe

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Summary

Government wage, benefit, and employment decisions are not taken on a profit-maximizing basis and have a substantial impact on aggregate labor market performance and unemployment. In a two-sector labor market model with free mobility of labor, an increase in government wages or benefits reduces private sector employment, and government employment is not an effective counter-cyclical instrument. Empirical tests for Greece confirm that the expansion of the public sector in the 1980s contributed to the deterioration of labor market performance.

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