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Public Wages, Public Employment, and Business Cycle Volatility: Evidence from U.S. Metro Areas

Author

Listed:
  • Boeing-Reicher, Claire A.

    (Kiel Institute for the World Economy)

  • Caponi, Vincenzo

    (CREST)

Abstract

Based on data from a cross section of U.S. metro areas, we show that public employment correlates negatively with business cycle volatility, hinting at a stabilizing effect of public employment, while public wages correlate weakly and positively with business cycle volatility, hinting at a destabilizing effect of public wages. To explain these relationships, we set up a search and matching model that contains a government sector and a role for government spending in product markets. This latter mechanism affects how the outside option behaves, and this mechanism can help a search and matching model to generate wage-reducing and stabilizing effects of public employment. Without this mechanism, a search and matching model cannot generate these effects.

Suggested Citation

  • Boeing-Reicher, Claire A. & Caponi, Vincenzo, 2016. "Public Wages, Public Employment, and Business Cycle Volatility: Evidence from U.S. Metro Areas," IZA Discussion Papers 9965, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9965
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    References listed on IDEAS

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    1. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October.
    2. James Albrecht & Monica Robayo-Abril & Susan Vroman, 2019. "Public-sector Employment in an Equilibrium Search and Matching Model," The Economic Journal, Royal Economic Society, vol. 129(617), pages 35-61.
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    5. Vincenzo Quadrini & Antonella Trigari, 2007. "Public Employment and the Business Cycle," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(4), pages 723-742, December.
    6. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
    7. George J. Borjas, 2002. "The Wage Structure and the Sorting of Workers into the Public Sector," NBER Working Papers 9313, National Bureau of Economic Research, Inc.
    8. Silva, José Ignacio & Toledo, Manuel, 2009. "Labor Turnover Costs And The Cyclical Behavior Of Vacancies And Unemployment," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 76-96, May.
    9. Justin Falk, 2012. "Comparing Benefits and Total Compensation in the Federal Government and the Private Sector: Working Paper 2012-04," Working Papers 42923, Congressional Budget Office.
    10. Caponi, Vincenzo, 2017. "Public employment policies and regional unemployment differences," Regional Science and Urban Economics, Elsevier, vol. 63(C), pages 1-12.
    11. Reicher, Claire, 2014. "A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments?," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 184-198.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Fontaine, Idriss & Gálvez-Iniesta, Ismael & Gomes, Pedro & Vila-Martin, Diego, 2020. "Labour market flows: Accounting for the public sector," Labour Economics, Elsevier, vol. 62(C).
    2. Caponi, Vincenzo, 2017. "Public employment policies and regional unemployment differences," Regional Science and Urban Economics, Elsevier, vol. 63(C), pages 1-12.
    3. Alberto Chong & Angelo Cozzubo, 2019. "Perverse Incentives? Labor Market Regulation and Performance in the Public Sector," Southern Economic Journal, John Wiley & Sons, vol. 86(1), pages 271-285, July.
    4. Vincenzo Caponi, 2017. "The effects of public sector employment on the economy," IZA World of Labor, Institute of Labor Economics (IZA), pages 332-332, January.
    5. Rattsø, Jørn & Stokke, Hildegunn E., 2019. "Identification of the private-public wage gap," Labour Economics, Elsevier, vol. 59(C), pages 153-163.
    6. Nalban, Valeriu & Smădu, Andra, 2021. "The interaction between private sector and public sector labor markets: Evidence from Romania," Economic Modelling, Elsevier, vol. 94(C), pages 804-821.

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    More about this item

    Keywords

    public employment; public wages; business cycle volatility; crowding out; search and matching;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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