Public Sector Growth and Labor Market Flexibility: The United States vs. The United Kingdom

This paper investigates whether a larger public sector limits labor market adjustment, using data from the United States and the United Kingdom, two countries with quite different public/private employment trends. The results indicate that the two countries have a similar mix of occupations and workers in the public versus the private sector. Both countries have experienced some overall convergence of the public/private wage differential over the 1980s, although the extent of this differential varies substantially by occupation and gender. Both countries have also seen wage inequality in the public and private sectors increase over the past decade. Variability in public sector employment and wages over time is generally as great as in the private sector, although the cyclical patterns are different. The US public sector, however, seems more responsive to private sector demand changes than does the public sector in the UK. The paper concludes that the public sectors of both countries show a substantial amount of change and adaptation, particularly over the past decade.