Government Employment and Wages and Labor Market Performance

IMF Working Papers, April 1, 1999

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Government Employment and Wages and Labor Market Performance

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Bibliographic details

• Authors: Zenon Kontolemis, Dimitri G Demekas
• Published: April 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451847604.001

Summary findings

• Government wage, benefit, and employment decisions are not taken on a profit-maximizing basis and have a substantial impact on aggregate labor market performance and unemployment.
• In a two-sector labor market model with free mobility of labor:
  • An increase in government wages or benefits reduces private sector employment.
  • Government employment is not an effective counter-cyclical instrument.
• Empirical tests for Greece confirm that the expansion of the public sector in the 1980s contributed to the deterioration of labor market performance.

Model analysis

• Two-sector labor market model with free mobility of labor used to analyze interactions between public and private sectors.
• Core mechanism: higher government wages or benefits attract labor to the public sector or raise reservation wages, leading to reduced private sector employment.

Empirical evidence (Greece)

• Tests specific to Greece support the model’s prediction: expansion of the public sector in the 1980s was associated with worse labor market outcomes and higher unemployment.

Policy implications and interpretation

• Policies that increase government wages or benefits can have unintended adverse effects on private sector employment and aggregate labor market performance.
• Expanding government employment is not an effective tool for counter-cyclical stabilization in the context analyzed.

Keywords and subjects (as listed)

• Subjects: Employment, Labor, Labor markets, Public employment, Public sector wages, Unemployment, Wages
• Keywords: Employment, employment decision, equilibrium condition, Europe, government act, government hiring, government policy, government sector Lg, labor market, labor market performance, Labor markets, populist tendency, private sector, private sector employer, private sector employment, production function, Public employment, public sector labor markets, reaction function, Unemployment, wage differential, wage differentials, Wages, WP

Key statistics and publication identifiers

• Pages: 29
• Volume: 1999
• Issue: 055
• Series: Working Paper No. 1999/055
• DOI: https://doi.org/10.5089/9781451847604.001
• Stock No: WPIEA0551999
• ISBN: 9781451847604
• ISSN: 1018-5941
• Authors: Zenon Kontolemis, Dimitri G Demekas
• Date: April 1, 1999

IMF Working Paper: "Government Employment and Wages and Labor Market Performance" by Zenon Kontolemis and Dimitri G Demekas (April 1, 1999).

Content in this bundle

• Government Employment and Wages and Labor Market Performance - WP/99/55
  • Government Employment and Wages and Labor Market Performance - WP/99/55 (Markdown version)
  • Government Employment and Wages and Labor Market Performance - WP/99/55 (PDF)