Optimal Public Sector Premium, Talent Misallocation, and Aggregate Productivity

Industry Overview - The report focuses on the Middle East and North Africa (MENA) region, particularly Egypt, where public sector employment is disproportionately high, with 22% of total employment in the public sector (18% for men and 42% for women) [11] - The public sector in Egypt employs a significant share of highly educated workers, with 25% of men and two-thirds of women with college education working in the public sector [11] - The study develops a general equilibrium model to analyze the optimal size of the public sector and the public sector premium, which is the wage premium paid to public sector workers compared to private sector workers [5] Core Findings - Aligning the public sector premium with its optimal level could result in aggregate efficiency gains of 12% for output per worker and 8% for total factor productivity (TFP) in Egypt [5] - The optimal public sector premium is positive for women but approaches zero for men, preventing a shift of mid-high-level skilled women from the public sector to non-market activities and a contraction of the male entrepreneurial sector [5] - A reduced female public sector premium fosters greater female labor force participation in market activities through an expansion of the female entrepreneurial sector, which increases the demand for production labor and drives wages up [5] Model Insights - The model incorporates three sectors: private, public, and home production, with women having the option to engage in home production [9] - In the private sector, individuals can run their own businesses or work as production workers, while in the public sector, individuals are employed as production workers or managers, with managerial roles receiving a gender-specific premium [10] - The optimal size of the public sector depends on the efficiency level of public goods in increasing the productivity of the private sector, with higher elasticity of private output to public goods leading to a larger optimal public sector size [8] Calibration and Results - The model is calibrated using data from Egypt, where public sector employment is significantly higher than the average of 108 non-MENA economies [11] - Reducing the public sector premium from the current level to the optimal level would decrease the size of the public sector from 22% to about 8% and increase female entrepreneurial activities [13] - The optimal talent allocation in Egypt requires a decrease in the average public sector premium from 22% to 13%, with the premium remaining positive for women and close to zero for men [13] Efficiency Gains - The study shows that reducing the public sector premium and the size of the public sector to their optimal levels yields aggregate efficiency gains of 12% for output per worker and 8% for TFP in Egypt [12] - The lower the elasticity of private sector output to public goods, the higher the productivity gains from reducing the public sector premium and the share of public sector employment [12] - The optimal public sector premium and employment share vary by gender, with women requiring a higher premium and a larger share of public sector employment compared to men to maximize aggregate productivity [92]