Redistribution through public employment: The case of Italy.(Brief Article)(Statistical Data Included)

MASSIMO ROSTAGNO (*)

This paper examines the regional distribution of public employment in Italy. It documents two facts. The first is that public employment is used as a subsidy from the North to the less wealthy South. About ha If of the wage bill in the South of Italy can be indentified as a subsidy. Both the size of public employment and the level of wages are used as a redistributive device. The second fact concerns the effects of subsidized public employment on individuals' attitudes toward job search, education, "risk taking" activities, and so on. Public employment discourages the development of market activities in the South. [JEL H53, J31, J64]

Two key roles of government are to provide public goods and to redistribute income across individuals and regions. Often these two functions overlap since public goods provision may also be used to compensate for geographical income imbalances. Public employment, in particular, can be used to support poorer regions or those with higher unemployment. This paper documents the size of this type of redistribution between the North and South of Italy and attempts to evaluate the efficiency of this type of policy. Italy is an especially interesting case because of the large income disparity between North and South and because of the large size of the public employment sector.

In this paper we first document the amount of geographical imbalance in the allocation of public jobs. Using survey evidence collected by the Bank of Italy, we then highlight various cultural and social consequences of an extensive reliance on public employment as a source of jobs and income. Third, we evaluate the amount of redistributive flows achieved with public employment.

Our results are striking. We conclude that about half of the public wage bill in the South of Italy can be defined as a "subsidy." This effect is due to a combination of the size of public employment and of the wage premium for public employees relative to alternative occupations. We also show that the reliance on public jobs as a redistributive channel implies sizable and possibly undesirable sociological effects. Since public jobs in the South are more attractive and available than private sector jobs, educational and attitudinal choices are tilted toward the public sector. Also, individuals do not want to exit the public sector unless they are forced to, and this creates path dependence and rigidities.

In a nutshell, the argument is the following. The two "regions" of Italy (North and South) are bound by a unitary fiscal system, which implies that public wages are almost identical in nominal terms between the North and South. Since the cost of living is much lower in the South, real public wages are lower in the North than in the South. Also, opportunities in the private sector are better in the North, so public employment is comparatively more attractive in the South, relative to alternative opportunities. As a result, residents in the South seek more public employment in order to take advantage of a large income premium and a greater job security. Over time the South is caught in an equilibrium of dependency in which public jobs are a critical source of disposable income and in which private opportunities do not materialize. (1) This creates a culture that discourages private activities and entrepreneurship and that becomes self-fulfilling: the less individuals are prepared to "face the market," the more they prefer public jobs.

But, if this is the case, why is this redistributive system chosen? One answer may be that this is simply a by-product of a centralized fiscal system and centralized union bargaining, which fixes equal nominal wages for the entire country. However, the lack of any attempt to diversify public wages between the North and South suggests that the implied redistribution might be politically desirable. The reason may be that redistribution through public employment is less visible than direct transfers, therefore it is politically less costly and may be more effective at creating patronage for local politicians. In fact, a model by Coate and Morris (1995), slightly modified by Alesina, Baqir, and Easterly (2000), clarifies this politico-economic argument. The idea is simple: suppose that a proposal that introduces a tax in region 1 (North) to finance a direct subsidy to region 2 (South) would not pass because it is opposed by voters in the North. Further assume that the government wants to redistribute toward the S outh and assume that, say, several new teachers are hired and disproportionately placed in the South. This second redistributive policy is less transparent (although perhaps less efficient) and may win approval even in the North because of the uncertainty about the real needs of the public school system.

Public employment may also be used to correct labor market imperfections. When labor markets do not produce full employment, say, because of tax distortions and rigidities, it is politically rewarding to offer public sector jobs. This is particularly the case when the welfare system (as in Italy) is distorted and ineffective at protecting the temporarily unemployed. In fact, Rostagno and Utili (1997) and Boeri (2000) describe the shortcomings of the Italian system of social protection and conclude that the Italian "welfare state" is very skewed in favor of retirees and does not protect efficiently the temporarily unemployed. Obviously, while a temporary unemployment subsidy may create incentives for job search, a permanent employment in the public sector does not. (2)

Public bureaucracies, once established, become a major political force. In many countries, and certainly in Italy, public sector unions are particularly strong and capable of protecting job security, if not the level of real wages. (3) This protection generates hysteresis: once public employment increases, it takes a long time to be reduced.

This is not the first paper that argues that public employment is used as a redistributive device. To begin with, there is an immense literature on public sector employment, most of which is focused on the United States. We refer the reader to the two excellent surveys by Ehrenberg and Schwarz (1986), and Gregory and Borland (1999). For our purposes, the latter paper, which focuses not only on the United States but on the evidence available for other member countries of the Organization for Economic Cooperation and Development (OECD) as well, concludes that "public sector employees generally have higher average earnings than private sector employees." Furthermore, the authors write, "in most countries, some part of this difference is also attributable to higher rates of pay or rents for public sector employees." Particularly interesting are the results of Borjas (1986), who examines wage variations in U.S. state public employment and attributes three-fourths of the interstate variation to political variables reflecting the demand of different constituencies. Also, Katz and Krueger (1991) find that in the United States, while local and state governments are responsive to local economic conditions, the market for federal employees is set outside the regional context.

I. The Distribution of Public Employment in Italy

The Data

As a source for macroeconomic data on regional differences, we draw on various Italian government statistics. Data on regional production, population, and employment are taken from publications of Istituto Nazionale di Statistica (ISTAT), Italy's national statistical institute (ISTAT, 1996a and 1996b). Figures on the regional distribution of public employment are taken from Il Conto Annuale (Italian Treasury, 1995), an annual publication of the Italian Treasury. Our data for postal and railroad employees have been provided by the Italian Treasury.

The main data source for our empirical microanalysis is the Bank of Italy survey on Household Income and Wealth (BIW). The BIW is a biannual household survey that covers all regions in Italy and contains a broad range of information on individual characteristics and economic performance. We use data from surveys in 1993 and 1995 that contain detailed information on socioeconomic factors relevant to our study.

The 1995 (1993) BIW survey provides information on 23,924 (24,013) individuals covering a total of 8,135 (8,089) households. A special feature of this survey is that it contains information on parents and children of the head of the household. This allows us to track intergenerational links (family ties) and relate them to public sector employment. In most of our analysis we restrict the sample to respondents between age 15 and 62 for men and 57 for women, the traditional standard age of retirement. (4) Note that the BIW survey oversamples government employees by a factor of two, an issue that we discuss below.

Table 1 lists all the variables used in this paper and their sources. Table 2 provides sample statistics for some of the variables used in our empirical analysis of the 1995 BIW survey.

Imbalance in the Distribution of Public Jobs

For the purposes of discussion in this paper, we have divided Italy into three regions: North, Center, and South. (5) As Table 3 shows, Italy has a pronounced mismatch between regional economic output and the use of its public resources. About 55 percent of total output is produced in the North, while only 44 percent of the total population resides there. Also, the South of Italy has considerably fewer labor force participants (51.5 percent compared with 62.5 percent in the North). The unemployment rate in the South (21.0 percent) is more than double that in the Center (10.3 percent) and about three times higher than that of the North (6.7 percent). (6)

The regional differences in the distribution of public jobs are large. Public civilian employment per capita is higher in the South than in the North (about 61 public employees per thousand population in the South versus 51 in the North). As a share of total employment the difference is even more staggering: 12 percent of the employed in the North are in the public sector against 21 percent in the South. The comparison with the Center is clouded by the presence of the national capital in the Lazio region. Including this region, public employment is artificially high in the Center. For this reason we focus mostly on North-South comparisons.

Table 3 underestimates the differences between North and South for two reasons. First, it does not include employees of public and semipublic enterprises. Second, Wagner's Law implies that the size of government (and thus the number of public employees) increases with income per capita. Since the South is poorer than the North, Wagner's Law predicts a smaller government sector in this region.

Differences in the age structure of the population in the North and the South may account for different levels of employment in two large sectors: education and health. In fact, the fraction of the population below age 14 is higher in the South than in the North (12.4 percent in the North versus 18.8 percent in the South). On the contrary, the share of the population above age 65 is higher in the North than in the South (18.2 percent versus 13.8 percent). This implies that one should expect more health care employees in the North and more teachers in the South. As Table 3 shows, health care employees are just slightly more evident in the North while teachers are far more numerous in the South. Note that the large number of teachers is able to keep class size as low as in the North. This is a form of redistribution, since poorer regions with more …