Public Sector and the Allocation of Skills in the Labor Market

Advisor: Gabriel Ulyssea

This paper investigates how the size of public sector employment affects the allocation of skills in the private sector. I develop a Roy model were workers self-select into either public or private sector. Workers are heterogeneous in their skills and risk aversion. There are some distinguishing features in public sector employment that make public sector wages more certain and disproportionately high for some skill levels. Those differences may influence workers' sector decision unevenly across skills, affecting the skill distribution available to the private sector. The private sector is characterized by positive assortative matching between skills and tasks. Changes in the skill distribution available to the private sector have effects on the allocation of skills to tasks which has consequences on wage inequality and productivity in the private sector. I estimate this model for Brazil using worker level data for the years of 2011-4 and use it to perform counter-factual exercises. Results show that removing the public sector from the economy increases private sector average productivity, decreases the college wage premium, but increases wage inequality.

M390