Private Sector vs Public Sector

Readers Question: Does job creation come from public or private sector?

  • The public sector is government (national and local). Public sector jobs include doctors, police, teachers, civil servants.
  • The private sector is private enterprises – retail, manufacturing, local services.

Public sector jobs as a share of total employment

employment-public-sector
Source: OECD
  • UK 23.5% (2013)
  • US 14.6% (2008)
  • China 32.8% (2003). In 1978 China’s rate was  100%. In 1995 (56.4%)
  • India 4.5% (2008)
  • France 20% (2014)
  • Cuba 80% (2010)

In former Soviet bloc countries, state employment accounted for 70-90% of employment. In developing countries, such as India and Bangladesh, employment rates are low 4-5% (due to a smaller share of tax revenue and limited government size.

Which sector is best for job creation?

Free market economists argue that the private sector is more suited to job creation because firms respond to consumer preferences and market trends and provide employment in areas of high demand.

Strengths of the private sector

Profit Incentive. Private firms have a profit incentive to cut costs and develop products demanded by consumers. In the government sector, this profit motive is often absent. Therefore government bodies have a greater tendency to be overstaffed and inefficient.

Bureaucracy. For political reasons, it is sometimes more difficult to get rid of surplus workers in the public sector than the private sector. Private businessmen don’t have to worry about political popularity and so are more willing to make people redundant if it helps efficiency. The public sector, on the other hand, is more likely to employ surplus workers in unproductive jobs.

Crowding out. If the public sector increases, then this is reducing resources for the private sector. For example, if we raise taxes to increase government spending then this means the private sector has lower resources for private sector investment. Therefore, if government spending can be reduced it will free up resources for more efficient private sector growth and job creation. Though there may be temporary problems from public sector spending cuts, in the long term, it will enable lower taxes and higher private sector investment.

Government spending that discourages productivity.

Some government spending can discourage productivity. For example,, welfare benefits can reduce the incentive to work and encourage economic inactivity. Reducing welfare benefits (e.g. making it more difficult to claim sickness/unemployment benefits may encourage people to get a work and become economically active. (though it may conflict with goals of equity)

Arguments for Public Sector

Public Goods

The private sector is very unlikely to provide public goods because of the free rider problem. Therefore, the government needs to provide nearly all goods with the characteristics of public goods. This includes street cleaning, military, police and the judicial system.

Merit goods and positive externalities

Goods with positive externalities will be under-consumed in a free market. For example, education and training could be provided in the free market, but generally there is under-consumption of the socially optimal level because private firms ignore positive externalities. Therefore, the government needs to intervene in public services such as health and education. By providing good quality training schemes, the government can help increase labour productivity and provide private firms with educated workers.

The same argument applies to investment in infrastructure. e.g. New train links, and roads.

Macro-economic stability

Private sector jobs are more volatile with regard to the economic cycle. In a recession, we can see a sharp fall in private sector employment as firms cut back on labour. In a recession, public sector jobs act as a stabiliser – limiting the rise in unemployment. J.M. Keynes argued that in a severe recession, the government should intervene and create more employment. For example, public works scheme such as the New Deal of the 1930s.

No Crowding Out in Liquidity Trap

If the economy is at full employment and growing strongly, higher government borrowing and spending will cause crowding out. However, in a recession, there may be a sharp rise in consumer saving. This leads to a fall in spending and spare capacity. In this situation, an increase in government spending financed by government borrowing doesn’t cause crowding out because the government is using private sector savings that would otherwise remain idle.

Conclusion

Both the public and private sector have a role to play. For general businesses without externalities, the private sector are likely to be more efficient and better at job creation. Reducing the scope of government spending could create more private sector opportunities for investment and job creation.

However, the private sector also need a good public sector to provide, education, health care and infrastructure investment. Also, the private sector need a stable macro-economy which the government has a role to provide. In a prolonged recession, the case for government intervention to create jobs is much stronger than when the economy is growing strongly.

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