Johan Flink (Åbo Akademi University)
This paper examines the impact of public sector employment on local labor markets in Finland across three periods (19962001, 20012006, and 20112016). Using OLS regression and an IV model with a shift-share instrument to address endogeneity, I estimate the effect of changes in public sector employment on private sector employment growth and other labor market outcomes. In the earlier periods, increased public employment has a neutral or positive effects on private employment, primarily driven by migration and, to a lesser extent, reduced local unemployment. The last period shows a clear negative effect on private employment. Theory suggest the impact of public sector employment depend on prevailing labor market conditions. These conditions vary across countries and can change over time. In Finland, the conditions during the early periods appears favorable, as high unemployment and large regional disparities meant that increased local labour demand resulted in reduced local unemployment and increased migration from other regions. Also, Finlands centralised wage-setting means rising local labor demand did not increase wage pressures that crowd out private sector growth. Conversely, the conditions during the last period became less beneficial in terms of facilitating positive effects from public employment growth, partly due to business cycle and partly due to structural changes. The outcomes during public sector expansion align with studies on growth phases, while results from the contraction period mirror findings on public sector reductions. This supports the idea that decreases in public sector employment are not simply the reverse of increases. However, rather than the effects being inherently asymmetrical, which have been suggested in the literature, I argue that the impact may evolve over time as conditions change.