The Effect of Public Sector on Private Jobs: Evidence From the Occupied West Bank

This paper estimates the short run effect of creating more public jobs on private employment in the occupied West Bank. Unlike most cited research, the results provide evidence that favors crowd in effect both at the aggregate employment level and across sectors. A main contribution of the paper is to empirically explore the underlying mechanisms that drive the results. They include increases in local demand as well as invariant increases in private wages. It turns out that increases in local labor force size is a driving factor for the latter channel. Interestingly, the increase in labor force participation exceeds the increase in public and private employment, leading to an increase in the number of unemployed. The paper also explores other mechanisms of the crowd in effect, including lack of public wage premium, lack of government capacity to absorb excess labor supply, and international cash grants.