Discussion Paper Details

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Title: The Impact of Public Employment: Evidence from Bonn

Author(s): Sascha O. Becker, Stephan Heblich and Daniel M Sturm

Publication Date: January 2018

Keyword(s): Economic Geography, German Division, Place-Based Policies and Public Employment

Programme Area(s): International Trade and Regional Economics

Abstract: This paper evaluates the impact of public employment on private sector activity using the relocation of the German federal government from Berlin to Bonn in the wake of the Second World War as a source of exogenous variation. To guide our empirical analysis, we develop a simple economic geography model in which public sector employment in a city can crowd out private employment through higher wages and house prices, but also generates potential productivity and amenity spillovers. We find that relative to a control group of cities, Bonn experiences a substantial increase in public employment. However, this results in only modest increases in private sector employment with each additional public sector job destroying around 0.2 jobs in industries and creating just over one additional job in other parts of the private sector. We show how this finding can be explained by our model and provide several pieces of evidence for the mechanisms emphasised by the model.

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Bibliographic Reference

Becker, S, Heblich, S and Sturm, D. 2018. 'The Impact of Public Employment: Evidence from Bonn'. London, Centre for Economic Policy Research.