The Political Economy of Public Sector Employment in Resource Dependent Countries

In this paper, we propose a political economic explanation for the well documented difference in labor market institutions between high natural resource per capita countries and those that are natural resource dependent but whose populations are large. This dichotomy is widespread but particularly apparent in the oil-rich countries of the Arab world. We argue that the natural resource endowment influences the policy that a dictatorship chooses. It is optimal for governments in countries of the first type to employ a large proportion of the population in the public sector, while it is optimal to set up a repressive security apparatus and employ a smaller proportion of the population when the natural resource endowment is small relative to the size of the population. We provide empirical support for our theory using global data on public wages, rents per capita and other correlates.