On the Optimal Size of Public Employment

Advisor: Eduardo Zilberman

A public job can be seen as a source of insurance against income risk. Indeed, many public employees have job stability, which is compounded with a less volatile and more compressed wage distribution. Hence, by increasing its number of public employees, the government enhances the overall degree of insurance in the economy. In this paper, I introduce public employment in a standard incomplete markets model with overlapping generations. The aim is to explore the welfare gains or losses due to a larger government, accounting for this extra source of insurance.