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(MIS)Allocation effects of an overpaid public sector
journal contribution
posted on 2023-06-10, 05:02 authored by Tiago Cavalcanti, Marcelo Rodrigues dos SantosMarcelo Rodrigues dos SantosThere is a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are different for public and private employees. Such differences affect the occupational choice of agents and might generate some type of misallocation. We develop a life-cycle model with endogenous occupational choice and heterogeneous agents to study the implications of an overpaid public sector. The model is estimated to be consistent with micro and macro evidence for Brazil, a country with a high public sector earnings premium. Our counterfactual exercises demonstrate that public–private earnings premium can generate important allocation effects and sizeable productivity losses. For instance, a reform that would decrease the public–private wage premium from its benchmark value of $19\%$ to $15\%$ and would align the pension of public sector workers with the one in place for private sector workers could increase aggregate output by nearly $11.2\%$ in the long run without any decrease in the supply of public infrastructure. We provide a decomposition of the aggregate effect into changes in factors accumulation and changes in TFP and implement a welfare distributive analysis.
History
Publication status
- Published
Journal
Journal of the European Economic AssociationISSN
1542-4766Publisher
Oxford University Press (OUP)External DOI
Issue
2Volume
19Page range
953-999Department affiliated with
- Economics Publications
Full text available
- No
Peer reviewed?
- Yes