Fiscal Policy Implications for Labor Market Outcomes in Middle-Income Countries
IMF Working Papers, January 23, 2015
Source details
- Canonical URL
- Fiscal Policy Implications for Labor Market Outcomes in Middle-Income Countries
Other formats
Bibliographic details
- Authors: Ara Stepanyan, Lamin Y Leigh
- Published: January 23, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484326800.001
Summary
- Many governments have initiated public employment programs or expanded the existing ones in response to high unemployment.
- In many middle-income countries, a relatively large government coexists with persistently high unemployment.
- This paper explores whether public employment gives rise to distortions in the labor market in the medium to long-run.
- The authors report that their findings do not provide any evidence that public employment reduces the unemployment rate.
- The analysis shows that large public employment significantly affects labor market outcomes in middle-income countries and leads to job destruction in the private sector.
- The extent of the impact is largely influenced by:
- the degree of substitutability between public and private production, and
- the size of the rents in the public sector.
Key Findings and Mechanisms
- No evidence that public employment reduces the unemployment rate.
- Large public employment can cause job destruction in the private sector.
- Impact channels identified:
- Substitutability between public and private production (higher substitutability increases crowding-out).
- Size of rents in the public sector (larger rents amplify distortions).
Policy Implications (inferred from analysis)
- Public employment expansion can have unintended negative effects on private-sector employment in middle-income countries when public and private outputs are substitutable.
- The design of public employment programs should consider:
- the degree of substitutability with private production, and
- measures to limit rents in the public sector to reduce crowding-out effects.
Subject Areas and Keywords
- Subject: Economic sectors; Employment; Labor; Labor markets; Public employment; Public sector; Unemployment
- Keywords: Africa; crowding-out effect; Employment; employment opportunity; labor market; Labor markets; private employment; private sector; private-sector job; public and private employment; public employment; Public employment; Public sector; representative private-sector firm; Unemployment; unemployment rate; wage premium; WP