The Keynes vs Hayek debate is at its sharpest on the issue of employment. Can government create jobs (as Balls says)? Or does large public sector employment simply displace economic activity that would happen elsewhere (as Osborne says)? A fascinating study has been released today by the Spatial Economics Research Centre at the LSE showing the damage done by public sector employment to the real economy. Drawing on a huge amount of local-level data over an eight-year period, it’s a serious piece of research that is worth looking into and deserves to impact our economic debate.
1. First, what is seen. In the short term, hiring someone to work for the government means another worker, who in turn spends. As the report puts it, ‘additional jobs may be generated as a result of increased demand for locally produced goods and services’. That is what is seen. In the short term — 2003-07 is the time period looked at — the study finds that for every 100 extra public sector jobs you get 50 additional jobs in the service and construction industries.
2. Next, what is unseen. Namely, the effect on other industries. For every 100 extra public sector jobs, the study finds 40 fewer jobs in manufacturing, because local businesses find it harder to hire people. This essentially cancels out the benefit in the service industry. As the study says, ‘Public sector employment has little effect on total private sector employment in the short run’. Over that four year period, expanding the public sector didn’t crowd out the private sector, but it didn’t help it grow either.
3. In the long-term, the public sector crowds out the private sector. Crucially, over a longer period (1999-2007) the study finds that enlarging the public sector causes even greater pain to manufacturing with no gain in the services industry. In fact, adding 100 extra public sector jobs leads to 100 fewer private sector ones, and leaves the overall employment level unchanged.
What the study does not say, but is blindingly obvious, is that manufacturing jobs are a whole lot more beneficial to the economy than public sector pen-pushers. So the net effect of all this is to make government bigger, but everyone poorer.