Employment in the Public Sector

42 Pages Posted: 6 Jan 2004

See all articles by Lorenzo Forni

Lorenzo Forni

International Monetary Fund (IMF)

Raffaela Giordano

Bank of Italy

Date Written: November 2003


This paper presents a model of wage-employment determination in private and public sectors, which allows us to analyze the effects of different institutional arrangements on labor market equilibria. In particular, it focuses on how different degrees of coordination in decision processes affect hiring and wage setting outcomes. Cooperation in unions' behavior results in wage increases and employment reduction in the private sector, whereas it induces wage moderation and employment expansion in the public sector. Not surprisingly, if public decision units do not fully internalize the aggregate budget constraint in their hiring processes, the public sector wage bill and the level of taxation increase, thus enhancing the crowding out effect on private employment. Such effect appears to be stronger in the presence of encompassing union behavior. An empirical analysis performed on a sample of OECD countries in the period 1960-2000 seems to support the main predictions of the model.

Keywords: public employment, wage bargaining, decentralization.

JEL Classification: E24, H50, H72, J45, J51

Suggested Citation

Forni, Lorenzo and Giordano, Raffaela, Employment in the Public Sector (November 2003). Available at SSRN: https://ssrn.com/abstract=478242

Lorenzo Forni (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Raffaela Giordano

Bank of Italy ( email )

Via Nazionale 91
00184 Roma

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