Optimal Public Sector Premium, Talent Misallocation, and Aggregate Productivity: Evidence from the Middle East and North Africa
Introduction
The structure of wages and labor laws often differ significantly between the public and private sectors in many countries. For instance, a public-private wage gap exists, and the public sector often offers more secure jobs with better job stability and fewer working hours. This raises several questions: Is the public sector too large? Are public sector workers overpaid? What are the efficiency gains from adjusting the public sector premium to its optimal level? What is the optimal size of the public sector?
Model and Key Findings
This paper develops a general equilibrium model to quantify the aggregate productivity gains from adjusting the public sector premium and its size to optimal levels. The optimal size of the public sector depends on the efficiency level of public spending in enhancing private sector productivity. The model incorporates an endogenous decision between market and non-market activities for women.
Key findings:
- Public Sector Premium and Efficiency: Aligning the public sector premium with its optimal level, thereby reducing the share of employment in the public sector, results in significant aggregate efficiency gains. Specifically, the gain is 12% for output per worker and 8% for total factor productivity.
- Elasticity of Private Output: Lower values of the elasticity of private output to public goods result in almost double the productivity gains.
- Optimal Premium: The optimal premium is positive for women and approaches zero for men, preventing a shift of mid-to-high-skilled women from the public sector to non-market activities and constraining the contraction of the male entrepreneurial sector.
- Female Labor Force Participation: A reduced female public sector premium fosters greater female labor force participation in market activities through an expansion of the female entrepreneurial sector, which increases the demand for production labor and drives wages up.
Conclusion
This paper highlights the trade-offs involved in the public sector's demand for talent and how the public sector premium affects aggregate output and productivity. The model demonstrates that optimizing the public sector premium and size can significantly enhance overall economic efficiency, particularly in regions with a disproportionately large public sector workforce.
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