Working Paper: CEPR ID: DP14321
Authors: Pietro Garibaldi; Pedro Gomes; Thepthida Sopraseuth
Abstract: The public sector hires disproportionately more educated workers.Using US microdata, we show that the education bias also holds within industries and in two thirds of 3-digit occupations. To rationalize this finding, we propose a model of private and public employment based on two features.First, alongside a perfectly competitive private sector, a cost-minimizing government acts with a wage schedule that does not equate supply and demand. Second, our economy features heterogeneity across individuals and jobs, and a simple sorting mechanism that generates underemployment -- educated workers performing unskilled jobs.The equilibrium model is parsimonious and is calibrated to match key moments of the US public and private sectors. We find that the public-sector wage differential and excess underemployment account for 15 percent of the education bias, with the remaining accounted for by technology. In a counterintuitive fashion, we find that more wage compression in the public sector raises inequality in the private sector. A 1 percent increase in unskilled public wages raises skilled private wages by 0.07 percent and lowers unskilled private wages by 0.06 percent.
Keywords: public-sector employment; public-sector wages; underemployment; education
JEL Codes: E24; J20; J24; J31; J45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public sector hiring practices (J45) | education bias (I24) |
| public sector wage differential (J45) | education bias (I24) |
| excess underemployment (E24) | education bias (I24) |
| technological requirements (O30) | education bias (I24) |
| public sector wage compression (J45) | private sector wage inequality (J31) |
| 1% increase in unskilled public wages (J38) | 0.07% increase in skilled private wages (J31) |
| 1% increase in unskilled public wages (J38) | 0.06% decrease in unskilled private wages (F66) |