Jobs in the public sector have been created in several Member States in response to the economic crisis. For instance, in Lithuania community jobs for which no specific qualifications are required and which have a maximum duration of six months have been created for registered unemployed people who do not receive unemployment benefit. In the United Kingdom, a new subsidised jobs programme has been introduced for young people and jobseekers in areas of high unemployment with a view to helping them to find work with local authorities and other community organisations.
In the short run, public sector employment creation may save and create jobs when economic activity declines. However, public sector employment creation has its limitations primarily because of fiscal constraints and because of its potential (long-term) adverse impact on labour supply in the private sector, especially if such measures turn out to be irreversible.
In the medium to long term, the adverse effects of public sector employment on private employment primarily stem from the degree of substitution between production in the public and private sectors, from the presence of rents in the public sector, and from its negative effect on job-seeking activity levels, see Algan et al. (2002). The higher the substitutability between the activities in the private and public sector, the larger the crowding out of the private sector employment by public sector employment creation will be. Moreover, to the extent that public sector employment provides better wages, better benefits, etc. it may also crowd out private employment, as private sector employees will negotiate for higher wages, having the public wage as fall-back position(29).
Public job creation will also negatively affect job-seeking activity levels in the private sector, thereby reducing employment in the private sector, (see Demekas and Kontolemis 2000). To avoid such lock-in effects, it is argued that the creation of (temporary) public sector employment should be accompanied by measures that encourage job seeking.
Public sector employment creation through public sector investment is sometimes seen as a more effective instrument, although there may be a significant time lag between the conception and execution of the investment, possibly limiting its usefulness for the current economic downturn.
All in all, while the use of public sector employment to deal with cyclical problems can raise difficulties, from a broad socio-economic perspective, it has the potential to provide employment opportunities for the disadvantaged who are adversely affected by the crisis and who are disadvantaged in the labour market (see Brodsky (2000)) especially during an economic downturn.
(28) | The assessment in this chapter is limited to labour market measures sensu stricto. This implies that employment effects of public works such as infrastructure building are not examined. |
(29) | Using a dynamic matching model, Choulet (2006) shows that while public job creation may improve employment in the short run, the creation of these jobs will affect employment negatively in the private sector in the medium term. |