The Impact of Government employment on Total Employment

In this paper, we analyze the relationship between public and private employment, and show how employment effects the performance of labor market. There are various transition mechanisms through which a change in public employment effects the whole economy and unemployment situation. Economic theory doesnصt provide a clear answer about how unemployment changes from public employment policies. Thus without a prior test, it isnصt possible to suggest which transition mechanisms in this regard work. So an unstructural approach is used for model specification and estimation in addition to comparative method for apprising labor market variables in Iran economy during last three decades. For econometrics model, various links between unemployment, real wages and public employment are studied to specify the nature of transition mechanism and determine the range of public employment crowding out of private employment. Findings of the research show in the short trun, the increase in public employment bring about a decrease in the unemployment rate. But in the long trun, it is not effective because the private imployment rate decreases at exactly the same rate that the public rate increases. Therefore, unemployment doesصnt improve from an increase in public employment created by the government.