The impact of public employment: evidence from Bonn

Sascha O. Becker, Stephan Heblich, Daniel M. Sturm

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Abstract

This paper evaluates the impact of changes in public employment on private sector activity using the creation of the new West German government in 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 affects private sector employment through its impact on wages and house prices and also through potential productivity and amenity spillovers to the private sector. 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 industry and creating just over one additional job in other parts of the private sector. We show how our model can explain this finding and provide several pieces of evidence for the mechanisms emphasized by the model.

Original languageEnglish
Article number103291
Number of pages20
JournalJournal of Urban Economics
Volume122
DOIs
Publication statusPublished - Mar 2021

Keywords

  • Economic geography
  • German division
  • Place-Based policies
  • Public employment

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