On the substitutability between public and private employment

In this note we provide empirical evidence that shows that there seems to be a high degree of substitutability between public and private employment. We estimate an aggregated production function with a CES specification over labor inputs both public and private. Under the assumption that private and public workers are paid their marginal products, we obtain an equation that relates wages' ratios with employment ratios. By estimating that expression for a number of OECD countries we find that for most countries this simple model can explain strikingly well the dynamics of the observed relationship between private and public labor sectors.