PUBLIC-SECTOR EMPLOYMENT, RENT SEEKING AND ECONOMIC-GROWTH

Surplus labour in the public sector is a characteristic of many developing countries. Consistent with theories of rent seeking behaviour, public sector surplus labour is viewed in this paper as the consequence of lobbying for more high-wage (and high-rent) employment. Section I presents evidence of such surplus labour. Section II uses public choice theory to explain the phenomenon and introduces a model of a segmented labour market with endogenous government hiring in response to unemployment. In section III a simple computable general equilibrium model is used to show how this can give rise to dynamic social costs and to quantify them. The effect of surplus labour on economic growth is shown to be potentially substantial while the government's attempt to reduce unemployment is shown to be futile. Heller and Tait found that public sector employment averaged 44% of total non-agricultural employment in 23 developing countries; extreme cases included Ghana (74%), India (72%), Tanzania (78%) and Zambia (81%). The equivalent figure for 14 industrialised countries was only 24%, and time series evidence suggests that it was even lower when they were at a comparable stage of development. -from Authors