Equilibrium Unemployment and Endogenous Public Sector Employment

• Main Authors: HO, Kong Weng, HOON, Hian Teck
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1997
• Subjects: Economics; Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1646; https://doi.org/10.1111/1467-999X.00024
• Institution: Singapore Management University

This paper develops a model of the equilibrium rate of unemployment with an endogenous share of public sector employment. We show how various macroeconomic shocks drive up the equilibrium rate of unemployment, accompanied by predictable variations in the public sector share of employment. In particular, under the empirically plausible assumptions that the public sector is relatively labor-intensive and the elasticity of substitution between capital and labor is less than unity, public sector employment is shown to be countercyclical. When the equilibrium unemployment rate rises over a prolonged time period, the public sector share of employment also rises.