Increasing Public Sector Not a Good Way to Reduce Inequality

Anyone with even the slightest familiarity of contemporary political life recognizes that the distinguishing feature of left-of-centre parties is their overriding commitment to the reduction of inequality. It is because they want to realize this goal that they generally support policies that increase the size of the public sector. This way, the state acquires the resources needed to redistribute incomes and wealth.

But there’s another, less well-known, component of this strategy. Augmenting the government means that more public sector workers need to be hired. By removing these newly hired individuals from the unemployment rolls, or from lower-paying private sector jobs, the left can endeavour to lower inequality by putting a larger bulk of the population on the government payroll with a higher income.

Does this work? Not necessarily. Or so Cheol-Sung Lee, Young-Bum Kim & Jae-Mahn Shim argue in the latest issue of the American Sociological Review. Based on a study of 16 developed nations from 1971-2003, they find that the strategy of hiring more public sector employees only decreases inequality where their productivity is roughly in line with those in the private sector.

But where productively is markedly less in the public sector, the strategy has negligible impact on inequality. In fact, the authors suggest that, in this scenario, budget and unemployment difficulties become more likely. This is because the government ends up forcibly extracting resources from more productive workers to compensate their less efficient counterparts at a rate above their marginal rate of productivity. Obviously, economic growth is going to be compromised if the most productive citizens are being penalized, while the least productive are being rewarded.  

So the question is: is there now a productivity divide between public and private sector workers that is not being reflected in their wages?

Here is the abstract of the paper:

The Limit of Equality Projects: Public-Sector Expansion, Sectoral Conflicts, and Income Inequality in Postindustrial Economies

Cheol-Sung Lee, Young-Bum Kim & Jae-Mahn Shim
American Sociological Review, February 2011, Pages 100-124

 Abstract:

In this study, we investigate how structural  of economic changes constrain an equality project, the public-sector expansion strategy. First, we describe a three-stage process in which a growing productivity gap between the private-manufacturing and public-service sectors disrupts traditional class solidarity. We contend that emerging conflicts between private and public sectors due to public-sector expansion and a growing inter-sectoral productivity gap eventually lead to employment and budget crises, as well as the weakening of coordinated wage-setting institutions. Furthermore, political, institutional, and economic transformations originating from sectoral cleavages and imbalance lead to increased income inequality. We test this argument using an unbalanced panel dataset on 16 advanced industrial democracies from 1971 to 2003. We find that public-sector employment has a strong negative effect on income inequality when the productivity gap between sectors is low. In such situations, public-sector employment fulfills its promise of equality and full employment. However, as the inter-sectoral productivity gap increases, the negative effect of public-sector expansion on income inequality evaporates. The findings suggest that severely uneven productivity gaps due to different degrees of technological innovations significantly weaken and limit the effectiveness of left-wing governments’ policy interventions through public-service expansion.

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