Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/215267 
Year of Publication: 
2019
Series/Report no.: 
IZA Discussion Papers No. 12871
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
The public sector hires disproportionately more educated workers. Using US microdata, we show that the education bias also holds within industries and in two thirds of 3-digit occupations. To rationalize this finding, we propose a model of private and public employment based on two features. First, alongside a perfectly competitive private sector, a cost-minimizing government acts with a wage schedule that does not equate supply and demand. Second, our economy features heterogeneity across individuals and jobs, and a simple sorting mechanism that generates underemployment – educated workers performing unskilled jobs. The equilibrium model is parsimonious and is calibrated to match key moments of the US public and private sectors. We find that the public-sector wage differential and excess underemployment account for 15 percent of the education bias, with the remaining accounted for by technology. In a counterintuitive fashion, we find that more wage compression in the public sector raises inequality in the private sector. A 1 percent increase in unskilled public wages raises skilled private wages by 0.07 percent and lowers unskilled private wages by 0.06 percent.
Subjects: 
public-sector employment
public-sector wages
underemployment
education
JEL: 
E24
E62l
J20
J24
J31
J45
Document Type: 
Working Paper

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