The Influence of Public Employment on Private Employment, Wages and Housing Costs in German Districts – An empirical analysis of Public Sector Employment and Local Multipliers

Abstract

In this paper I investigate the impact of regional public employment changes on private employment, prices, and wages. Public employment is often used as an instrument of regional and economic stimulus, currently in the Corona stimulus package. Yet its effect is controversial. Studies on regional outcomes find both multiplier and displacement effects. Comparisons are complicated by study periods with growing or shrinking public sectors. Displacement predominates under public sector contraction, while multipliers prevail under expansion.Based on the Keynesian multiplier and general equilibrium model and building on Faggio & Overmann (2014), my analysis uses a dual (public/private) economy with two private sectors: tradable and non-tradable. Multiplier effects following increased demand are expected in the non-tradable sector, while crowding-out effects from cost increases should prevail in the tradable sector. Models on the connection of public- with private- and sectoral job changes as well as with prices and wages are formulated to test this. In addition, an instrumental variables model is constructed as it is robust to biases. The analysis uses district data from 2009-2019, with population, regional type, and qualification structure as control variables.The regression analyses find a significant multiplier effect of 0.7 additional private jobs per new public position. The value in the instrumental variables analysis is higher, indicating a reduced potential in supporting lagging regions. The multiplier effect only affects the non-tradable sector; tradable employment does not change significantly. The expansion of the public sector also leads to higher wages and prices, the latter approximated by asking rents.I develop an explanation of asymmetric multipliers. Under public employment expansion and contraction, the private sector grows. This can be explained by regional demand. Public sector job cuts occur through privatizations and retirements. This lowers the wage level but hardly weakens regional demand. Therefore, the private sector grows. New jobs during public sector expansion generate in-migration, which increases regional demand and private employment.Public employment expansion raises wages and prices. Due to demand effects, private employment increases as well. From a scientific point of view, measures such as the Corona stimulus package are therefore suitable for strengthening private employment.