The Unintended Consequences of Meritocratic Government Hiring

By Athanasios Geromichalos and Ioannis Kospentaris

In an attempt to mitigate the negative effects of clientelism, many governments around the world have adopted meritocratic hiring of public employees. This paper challenges the effectiveness of this common practice by showing that meritocratic government hiring can have unintended negative consequences on macroeconomic aggregates. In many countries, public employees enjoy considerable job security and generous compensation schemes; as a result, many talented workers choose to work for the public sector, which deprives the private sector of productive potential employees. This, in turn, reduces firms’ incentives to create jobs, increases unemployment, and lowers GDP. To quantify the effects of this novel channel, we extend the standard Diamond-Mortensen-Pissarides model to incorporate workers of heterogeneous productivity and a government that fills public sector jobs based on merit. We calibrate the model to aggregate data from Greece and perform a series of counterfactual exercises. We find that the adverse effects of our mechanism on the economy’s TFP, GDP, and unemployment are sizable.

The brightest minds will go where the best money is to be had. In a corrupt society, they will be the best at exploiting rents. They will go where the private gain is the highest. Is this where the social gain is the highest? If this is the case for the public sector, then I am fine with the perks of working there. The problem is that it has always been very difficult to measure this social gain, but it is obviously not high if you have a corrupt public sector.

I wonder, though whether the same reasoning could be applied to other sectors. For example in the United States, Wall Street has been attracting the best talent for years up to the Financial Crisis. Now it seems to be Silicon Valley. Are we better off now? Could one improve by attracting the best talent to the public sector?


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