Project

The Interaction of Public and Private Sector Employment in Least Developed Countries

Juan Pablo Rud and Ija Trapeznikova

Small Research Grant

Labour markets in many low-income countries exhibit a public sector that comprises a large share of wage employment, pays higher wages, and provides greater job stability. These differences can reflect institutional features of the public sector (e.g. rent-seeking), productivity shortcomings in the private sector (due to poor infrastructure, investment barriers, etc.), heterogeneity in the selection of workers (e.g. skill composition), or a combination of these factors. This can deprive the private sector of talented workers in the economy, hindering growth. This project investigates the drivers and effect of the high public sector wage premium, and to analyse the interplay between the public and private sectors in terms of job creation, productivity, workers' composition, and wages.

The researchers first produce a detailed empirical description of labour market outcomes in low-income economies based on individual-level data for a number of sub-Saharan countries. They focus on labour earnings in the private and public sectors, the size of these sectors, workers' mobility between them, and the gender pay gap in each. The researchers then develop and estimate a model to better understand what drives private sector productivity and job creation, how the public sector decides its size and sets wages, and how these phenomena interact to provide an equilibrium allocation of workers across different occupations. Key mechanisms examined are barriers to entry, labour market frictions, and the artificially high public-sector wage premium.

This project will help bring the attention of academics and policymakers to existing data sources that are available for public use in sub-Saharan countries. Further, the key labour market statistics derived from the analysis, in combination with macro-level indicators (e.g. Doing Business indices), can inform structural macro-development models of these countries used by both academics and policymakers. Lastly, policymakers will be able to use the estimated model to assess questions around counterfactual policies such as how much an economy can benefit from public sector reform or whether investment in firms' productivity (via improving technology or attracting FDI) would be more effective than facilitating entry (such as by providing start-up loans) or enhancing workers' productivity (through educational investments).

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