Life after public employment retrenchment: evidence from Italian municipalities

Abstract

We investigate the interaction between public and private employment at the local level. In contrast to previous literature, which has mainly examined public sector expansions, we provide evidence about the impact of downsizing. Using data from Italian municipalities, the IV strategy we adopt here exploits the fact that the contraction in public employment observed between the last two Censuses (2001–2011) was strongly influenced by the decision made by central government, with little reference to local economic conditions. Our results suggest that exogenous reductions in public employment stimulate the growth of private jobs, mostly in tradables. The change in local prices, especially for housing services, represents a relevant channel for the interplay between the tradable and non-tradable sectors.