Does Labour Market Risk Increase the Size of the Public Sector? Evidence from Swedish Municipalities

It has been argued that the public sector is an insurance against otherwise uninsurable risks. If that is the case, it is reasonable to expect the public sector to be larger in regions where the private labour-market is risky. Using data from Swedish municipalities, this paper reports that labour-market risk has a substantial impact on public employment. The results for aggregate spending and taxation are, however, much weaker and labor-market risk thus affects the labour intensity of the municipal public sector.