 |
The public sector hires disproportionately more educated workers. Using US data
from the CPS, we show that this college bias holds across gender, age, states, level of
government, as well as over time. It is also true 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 key features. First, alongside a perfectly competitive
private sector, our economy features a cost-minimizing government that 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. The equilibrium model is parsimonious and can
be calibrated to match key moments of the US public and private sectors. We find
that, in the US economy, the excess hiring of skilled in the public sector is mainly
accounted for by technological consideration, with the public wage differential and
excess underemployment in the public sector accounting for 15 percent of the education
bias. In addition, 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.
