The size of the public sector in terms of employment and compensation has a strong life-cycle dimension. We establish a quantitative partial-equilibrium life-cycle model with incomplete markets, private and public sectors, and risk-averse workers, and use it to (i) calculate three dimensions of public-sector compensation: wage, pension, and job-security premia, and (ii) quantify the effects of harmonizing the compensation in the two sectors. We find that the job-security and pensions premia are important forms of compensation to public-sector workers. Harmonizing the characteristics of public employment with those of the private sector would lower the unemployment rate and reduce government costs.
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