Municipal labour demand

In this paper we investigate the determinants of municipal labour demand in Sweden 1988-1995. Utilising a major grant reform in 1993, through which a switch from mainly targeted to mainly general central government grants occurred, we are able to identify which type of grants that have the largest effects on municipal employment. We find a larger municipal employment elasticity with respect to grants before the reform, implying that the more freedom given to the municipalities, the less they seem inclined to spend on municipal employment. We further find (i) a short run wage elasticity of appoximately -0.5 and a long run ditto of approximately -0.9, (ii) a quite sluggish adjustment process: only 60% of the desired change in municipal employment is implemented in the first year, (iii) that the demographic structure is an important determinant of municipal employment, and (iv) that the behavioural pattern is different in “socialist” municipalities.

Introduction: Despite the fact that most local governments in the western world are large employers, there are very few studies investigating the determinants of local government labour demand. This pattern is especially pronounced in Sweden, where the total local government sector accounts for about 30% of total employment in the economy. The corresponding figure for the municipalities is about 20%, and wages and payroll taxes constitute approximately 50% of municipal expenditures. This makes the local governments in Sweden the largest single employer in the economy,but still no studies exist examining the factors governing Swedish local government labour demand.

Author: Pål Bergström, Matz Dahlberg,Eva Johansson

Source: IFAU – Institute for Labour Market Policy Evaluation

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