Public Sector and the Allocation of Skills in the Labor Market

This paper investigates how public sector employment affects the allocation of skills in the economy. We develop an equilibrium Roy model where workers self-select into public or private sectors based on their productivity and... [ view full abstract ]

This paper investigates how public sector employment affects the allocation of skills in the economy. We develop an equilibrium Roy model where workers self-select into public or private sectors based on their productivity and risk aversion. The private sector is characterized by positive assortative matching between skills and tasks, but it has uncertain returns, which potentially creates a trade-off for workers. We estimate the model using Brazilian worker level data and use it to perform counter-factual exercises. We show that reducing the size of the public sector increases private sector average productivity, decreases the college wage premium, but increases overall wage inequality.