We investigate the consequences of public employment on local economies. We start by presenting a spatial-equilibrium framework, to highlight that the housing market is an important channel through which a variation in public employment affects private employment.
We then provide empirical evidence from Italian municipalities, focusing on the strong contraction in the public sector workforce that occurred between the last two Censuses (2001-2011). We use an IV identification strategy that exploits the fact that variations in local public employment were strongly influenced by central government decisions, with little reference to the economic conditions of the municipalities.
Our results suggest that exogenous contractions in public employment lead to an increase of private jobs, and that competition in the housing market seems to be a relevant explanation for this finding.
