Public Sector Employment in an Equilibrium Search and Matching Model

In this paper, we extend the standard Pissarides model of equilib- rium unemployment to incorporate public-sector employment. We modify the Pissarides model in three ways. First, we assume that workers are het- erogeneous in terms of human capital. Second, we assume that productivity is match speciÂc and that the distribution of match-speciÂc productivity is more favorable in the sense of Ârst-order stochastic dominance the higher is a workerÂs human capital. Third, we allow for both private- and public- sector employment. In this preliminary version of the paper, we lay out the model and prove the existence of equilibrium. In the next version of the paper, we will numerically analyze the e¤ects of public-sector employment policy on the distributions of wages, productivities and human capital levels in the two sectors and on overall employment and welfare.