Working Paper: CEPR ID: DP12565
Authors: Sascha O. Becker; Stephan Heblich; Daniel M. Sturm
Abstract: This paper evaluates the impact of public employment on private sector activity using the relocation of the German federal government from Berlin to Bonn in the wake of the Second World War as a source of exogenous variation. To guide our empirical analysis, we develop a simple economic geography model in which public sector employment in a city can crowd out private employment through higher wages and house prices, but also generates potential productivity and amenity spillovers. We find that relative to a control group of cities, Bonn experiences a substantial increase in public employment. However, this results in only modest increases in private sector employment with each additional public sector job destroying around 0.2 jobs in industries and creating just over one additional job in other parts of the private sector. We show how this finding can be explained by our model and provide several pieces of evidence for the mechanisms emphasised by the model.
Keywords: Economic Geography; Public Employment; Place-Based Policies; German Division
JEL Codes: F15; J45; N44; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public employment in Bonn (J68) | Private sector employment (J45) |
| Public employment in Bonn (J68) | Private sector jobs lost in tradable sector (F16) |
| Public employment in Bonn (J68) | Private sector jobs created in nontradable sector (J49) |
| Public employment in Bonn (J68) | Crowding out of private sector jobs (J68) |
| Public employment in Bonn (J68) | Amenity spillovers to private sector (R53) |
| Public employment in Bonn (J68) | Productivity spillovers to private sector (O49) |