The Regional Distribution of Public Employment: Theory and Evidence

We analyze the optimal regional pattern of public employment in an informationconstrained second-best redistribution policy showing that regionally differentiated
public employment can serve as an expenditure side tagging device, bypassing or
relaxing the equity-efficiency trade-off. The optimal pattern exhibits higher levels of
public employment in low productivity regions and is more pronounced the higher
is the degree of regional inequality within the country. Empirically, using a panel
of European regions from 1995-2007, we find evidence that public employment is
systematically higher in low productivity regions. The latter effect is stronger in
countries with higher levels of regional inequality