Government Employment Programs, Unemployment, and Capital Accumulation

Governments, especially in developing countries, routinely provide large-scale public employment programs. This paper studies such programs and their impact on unemployment rates, capital accumulation, and the process of development. An overlapping generations model with production is studied where agents differ in their intrinsic productive abilities and this is private information. Firms wishing to hire from among the high ability agents use equilibrium unemployment as a sorting device. There is also a government that uses lump-sum taxes to fund an employment program of the Keynesian "pump-priming" variety. Multiple levels of long-run real activity is a possibility here. The volume of the employment program matters crucially. Indeed, below (above) a critical level, further increases in the volume of the public employment programs improves (lowers) long-run real activity for countries stuck at the low-activity steady state, and may even help them get out development traps. Extensions of the framework to study unemployment insurance policies, as well as "productive" employment programs, are also discussed. The possibility arises that increases in the volume of the employment program may actually increase the unemployment rate