Public Sector Efficiency and Fiscal Austerity

IMF Working Papers, April 1, 1998

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Public Sector Efficiency and Fiscal Austerity

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Bibliographic details

• Published: April 1, 1998
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451968514.001

Summary / Main findings

• The paper uses a simple model to analyze the forces that determine the size of the public sector and the quality of workers employed in that sector.
• Workers are heterogeneous.
• The public sector chooses an employment strategy that maximizes a social welfare function U(s, Y) that depends on:
  • the share of the labor force employed in public service s, and
  • private sector output Y.
• The government is fully informed about worker productivity.
• By examining the welfare properties of the possible outcomes, the paper illuminates situations in which policies that seek to constrain the public sector may or may not improve economic efficiency.

Methodology and model features

• Model type: simple theoretical model of public vs. private employment choice.
• Key variables and functions:
  • s = share of the labor force employed in public service.
  • Y = private sector output.
  • U(s, Y) = social welfare function the public sector maximizes.
• Information assumption: the government is fully informed about worker productivity.
• Worker characteristic: heterogeneity in productivity across workers.

Policy implications and interpretations

• Constraining the public sector can have ambiguous effects on economic efficiency; outcomes depend on welfare properties derived from the model.
• The analysis provides guidance on when fiscal austerity measures that reduce public employment are likely to improve or worsen allocative efficiency, conditional on the distribution of worker productivity and the welfare function U(s, Y).

Publication and metadata

• Publication title: Public Sector Efficiency and Fiscal Austerity
• Publication type: IMF Working Papers
• Date: April 1, 1998
• Pages: 24
• Volume: 1998
• Issue: 056
• Series: Working Paper No. 1998/056
• DOI: https://doi.org/10.5089/9781451968514.001
• Stock No: WPIEA0561998
• ISBN: 9781451968514
• ISSN: 1018-5941
• Subject: Economic sectors, Labor, Labor force, Labor markets, Public employment, Public sector, Public sector wages
• Keywords: Governance, Labor force, labor markets, output level, output net, private sector, private sector output, Public employment, public sector, Public sector wages, worker productivity, WP

International Monetary Fund. "Public Sector Efficiency and Fiscal Austerity", IMF Working Papers 1998, 056 (1998).

Content in this bundle

• Public Sector Efficiency and Fiscal Austerity - WP/98/56
  • Public Sector Efficiency and Fiscal Austerity - WP/98/56 (Markdown version)
  • Public Sector Efficiency and Fiscal Austerity - WP/98/56 (PDF)