Governments in both developing and developed economies play an active role in labor markets in the form of providing both formal public sector jobs and employment through public workfare programs. We refer to this as employment targeting. In the context of a simple search and matching friction model, we show that the propensity for the public sector to target more employment can increase the unemployment rate in the economy and lead to an increase in the size of the informal sector. Employment targeting can therefore have perverse e¤ects on labor market outcomes.
The present model analyses how the state would provide services when the change of power depends upon the performance of the state. Agents can evaluate state performance based either only on the receipt of government services, or both on the benefit from government services and taxes imposed. With a credible threat of power change, if the valuation of the government services is low, along with a low fiscal capacity, then it is less probable that this service would be provided. Furthermore, such an allocation is compared with a situation, when there exists a threat of active opposition. Interestingly, that threat does not change the optimum provisioning of government services (as compared to the previous situation) in the equilibrium. JEL classification: D72, D74, H2, H4
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