Public sector employment rigidity and macroeconomic fluctuation: A DSGE simulation for China

Public sector employment in China has exhibited pronounced non-cyclical characteristics, with a recruiting scale and wage level showing limited responsiveness to economic fluctuations. The allure of civil service jobs in China has seen a significant resurgence post-COVID-19, with an observable increase in demand among educated job seekers for stable government positions amid growing economic uncertainties. This study investigates the implications of public sector employment rigidity on macroeconomic stability using a dynamic stochastic general equilibrium (DSGE) model integrated with search and matching (S&M) theory. Simulations incorporating alternative government job policies reveal that non-cyclical public employment exacerbates macroeconomic cyclical fluctuations. The low elasticity of public sector wages with respect to corporate wages fosters stable expectations among workers regarding the future value of government jobs, increasing the perceived value of the current state of unemployment. This leads job seekers to voluntarily remain unemployed, reducing labor supply to firms. Meantime, it preserves workers' bargaining power with firms, reinforcing wage stickiness and undermining the stabilizing role of price adjustments in employment. Hypothetical scenario analyses indicate that adopting a pro-cyclical wage policy for the public sector can mitigate the obstacles of wage cuts for firms, stimulate the creation of new jobs during economic downturns, and consequently reduce the magnitude and duration of rising unemployment rates. In contrast, maintaining a non-cyclical public sector wage may not prevent a continuous rise in unemployment or a worsening economic situation, even with expanded sector recruitment. This finding holds significant relevance in the context of the post-COVID era characterized by an economic slump and employment tension, providing theoretical support for establishing a transparent and flexible wage adjustment mechanism in the public sector that is linked to market conditions.