In recent years there has been an upsurge in academic and policy interest on the relationship between public sector employment and private sector jobs. This has followed partly from policy developments related to public sector downsizing and cuts (e.g. as a response to the fiscal crisis in the Eurozone). However, studies that looked at the direct impact of public sector size on local labour markets are still scarce. This paper aims to investigate how changes in public sector size affected local economy in transitioning countries by using Serbia as a particular case at hand.
Transitioning countries are countries that downsized formerly dominant public sector through large scales privatisations. Although these countries achieved a transfer from communist to market system there is still a substantial influence of the public sector on local economy. In particular case of Serbia, although the public sector share in employment has been reduced significantly during the mature period of transition,”from 43 per cent in 2004 to 35 per cent in 2007, it is still unambiguously large2. Furthermore, in the same period the public sector average wage premium has been increasing, from close to zero in 2004 to 19 per cent in 20073 (Nikolic, 2014). The size of the public sector and increasing public sector wage premium raise concerns about workers’ flow efficiency between sectors.
This paper attempts to reveal effects of both size of the public sector employment and the level of public sector wages on private sector wages. These effects are expected to vary predominantly across regions given the differences in pace of public sector restructuring, speed of privatisation and other region-specific factors (Arandarenko and Nojković, 2007). For this reason, the paper presents effects at the local level estimated at two geographical scales: municipality and district level. The paper uses micro-data from Serbia in the major period of economic transition just before the global recession, i.e. from 2004 until 2007. We rely on an extended Mincerian wage equation, specified at the individual level to which various controls for the impact of the public sector are added.