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Public employment and economic growth

Author

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  • Diogo Baerlocher

    (University of South Florida)

Abstract

This paper shows that there is an inverted U-shaped relationship between public employment and economic growth. The government allocates workers to the production of public goods, which reduces operational costs, increasing the number of firms in the market, and creating incentives to innovate. Conversely, large public sectors crowd out the labor market, reducing the number of firms and the incentives to innovate. An extension of the model shows that the average human capital of public workers has the same relationship with economic growth. Therefore, even countries with small public sectors can hinder economic growth by hiring many high-productivity workers. The paper also provides empirical evidence of an inverted U-shaped correlation between the share of public workers and economic growth using data from the Worldwide Bureaucracy Indicator and the Penn World Tables. Numerical exercises show that the model replicates the inverted U-shaped relationship between public employment and economic growth found in the data.

Suggested Citation

  • Diogo Baerlocher, 2022. "Public employment and economic growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 211-236, February.
    • Handle: RePEc:spr:joecth:v:73:y:2022:i:1:d:10.1007_s00199-020-01333-6
    DOI: 10.1007/s00199-020-01333-6
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    More about this item

    Keywords

    Public employment; Innovation; Competition; Endogenous growth;
    All these keywords.

    JEL classification:

    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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