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In most countries, the public sector hires disproportionally more women than men. We document gender differences in employment, transition probabilities, hours, and wages in the public and private sector using microdata for the United States, the United Kingdom, France, and Spain. We then build a search and matching model where men and women decide if to participate and if to enter private or public sector labor markets. We calibrate our model separately to the four countries. Running counterfactual experiments, we quantify whether the selection of women into the public sector is driven by: (i) lower gender wage gaps and thus relatively higher wages for women in the public sector, (ii) possibilities of better conciliation of work and family life for public sector workers, (iii) greater job security in the public compared to the private sector, or (iv) intrinsic preferences for public sector occupations. We find that, quantitatively, women's higher public sector wage premia and their preferences for working in the public sector explain most of the selection. We calculate the monetary value of public sector job security and work-life balance premia, for both men and women, and we estimate how higher public sector wages and employment affect male and female unemployment, inactivity rates, and wages differently.

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Countries that have relatively fewer workers with a secondary education have smaller firms. The shortage of skilled workers limits the growth of more productive firms. Two factors influence the availability of skilled workers: (i) the education level of the workforce and (ii) large public sectors that predominantly hire individuals with a better education. [The authors] set up a model economy with a government and private firm formation where production requires unskilled and skilled jobs. Workers with a secondary education are pivotal as they can perform both types of jobs.

[The authors] find that level of education and public sector employment account for 40-45 per cent of the differences between the United States and Mexico in terms of average firm size, [gross domestic product] GDP per capita, and GDP per hour worked. {The authors] also show that the impact of public employment on skill premiums and productivity measures depends on the skill bias in public hiring.

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We propose a simple theory of under- and over-employment. Individuals of high type can perform both skilled and unskilled jobs, but only a fraction of low-type workers can perform skilled jobs. People have different non-pecuniary values over these jobs, akin to a Roy model. We calibrate two versions of the model to match moments of 17 OECD economies, considering separately education and skills mismatch. The cost of mismatch is 3 per cent of output on average but varies between -1 per cent to 9 per cent across countries. The key variable that explains the output cost of mismatch is not the percentage of mismatched workers but their wage relative to well-matched workers.

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