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. Most importantly, if the public sector has the power to attract the most talented workers in the economy, it might deprive the private sector of a key driver of growth. This project focuses on the interplay between the public and private sectors in the LICs and what effect public sector employment and pay policies can have on worker composition, job creation, wages, and productivity in the private sector.
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 public-sector wages and vacancies.
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).
Our preliminary findings show that the public sector tends to hire substantially more educated workers, it provides better stability, and pays a significant wage premium of about 40% on average, even after controlling for worker demographic characteristics. Based on these empirical results, we propose a search model with public and private sector, entry costs, and firm and worker heterogeneity. Our model generates a mechanism, through which exogenous increase in the public sector wages and employment may have a negative effect on private sector employment, wages, and productivity. The main reason for this result is a tendency of highly educated workers to search for a job in the public sector, thus depriving private firms with vacancies of more productive workers. Our preliminary results suggest that these negative effects are larger when the entry costs or other entry barriers are higher.