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Employment targeting in a frictional labor market

Author

Listed:
  • Chetan Ghate
  • Debojyoti Mazumder

Abstract

Purpose - Governments in both developing and developed economies play an active role in labor markets in the form of providing both formal public sector jobs and employment through public workfare programs. The authors refer to this as employment targeting. The purpose of the paper is to consider different labor market effects of employment targeting in a stylized model of a developing economy. In the context of a simple search and matching friction model, the authors show that the propensity for the public sector to target more employment can increase the unemployment rate in the economy and lead to an increase in the size of the informal sector. Design/methodology/approach - The model is an application of a search and matching model of labor market frictions, where agents have heterogeneous abilities. The authors introduce a public sector alongside the private sector in the economy. Wage in the private sector is determined through Nash bargaining, whereas the public sector wage is exogenously fixed. In this setup, the public sector hiring rate influences private sector job creation and hence the overall employment rate of the economy. As an extension, the authors model the informal sector coupled with the other two sectors. This resembles developing economies. Then, the authors check the overall labor market effects of employment targeting through public sector intervention. Findings - In the context of a simple search and matching friction model with heterogeneous agents, the authors show that the propensity for the public sector to target more employment can increase the unemployment rate in the economy and lead to an increase in the size of the informal sector. Employment targeting can, therefore, have perverse effects on labor market outcomes. The authors also find that it is possible that the private sector wage falls as a result of an increase in the public sector hiring rate, which leads to more job creation in the private sector. Originality/value - What is less understood in the literature is the impact of employment targeting on the size of the informal sector in developing economies. The authors fill this gap and show that public sector intervention can have perverse effects on overall job creation and the size of the informal sector. Moreover, a decrease in the private sector wage due to a rise in public sector hiring reverses the consensus findings in the search and matching literature which show that an increase in public sector employment disincentivizes private sector vacancy postings.

Suggested Citation

  • Chetan Ghate & Debojyoti Mazumder, 2019. "Employment targeting in a frictional labor market," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 12(2), pages 242-262, June.
  • Handle: RePEc:eme:igdrpp:igdr-06-2018-0065
    DOI: 10.1108/IGDR-06-2018-0065
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    References listed on IDEAS

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    2. James Albrecht & Lucas Navarro & Susan Vroman, 2009. "The Effects of Labour Market Policies in an Economy with an Informal Sector," Economic Journal, Royal Economic Society, vol. 119(539), pages 1105-1129, July.
    3. Charlot, Olivier & Malherbet, Franck & Ulus, Mustafa, 2013. "Efficiency in a search and matching economy with a competitive informal sector," Economics Letters, Elsevier, vol. 118(1), pages 192-194.
    4. Basu, Arnab K. & Chau, Nancy H. & Kanbur, Ravi, 2009. "A theory of employment guarantees: Contestability, credibility and distributional concerns," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 482-497, April.
    5. Maarek, Paul, 2012. "Labor share, informal sector and development," MPRA Paper 38756, University Library of Munich, Germany.
    6. Pedro Gomes, 2015. "Optimal Public Sector Wages," Economic Journal, Royal Economic Society, vol. 125(587), pages 1425-1451, September.
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    More about this item

    Keywords

    Fiscal policy; Informal sector; Employment targeting; Search and matching frictions; Labor markets; Indian economy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General

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