Working Paper: CEPR ID: DP16085
Authors: Arthur Guillouzouic; Emeric Henry; Joan Monras
Abstract: Using French data, we provide: a) causal evidence that a drop in local public goods provision decreases private sector activity, and b) evidence consistent with monopsony power of the public sector in local labor markets. We introduce a public sector with these two key characteristics in an otherwise standard spatial equilibrium model, and show that it delivers the main stylized facts established in our data, in particular, that the share of the public sector relative to the private is independent of the productivity of the city. We emphasize the tradeoffs between allowing governments to freely choose local public employment and wages (as in most of the US public sector), versus imposing rules that constrain public sector pay with some indexation to the local cost of living (as in many European countries). We show that wage indexation limits monopsony power -- leading to a larger public sector -- and is optimal if the indexation is sufficiently strong.
Keywords: local public goods; public service; market power; spatial economics
JEL Codes: H41; J42; J45; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in public sector employment (J45) | Decline in private sector employment (J63) |
| Provision of local public goods (H41) | Private sector productivity (O49) |
| Decrease in public sector employment (J45) | Provision of local public goods (H41) |
| Public sector employment (J45) | Private sector employment (J45) |