The Determinants of Public Sector Employment in the Western Balkans

This paper explores the determinants of public sector employment in five Western Balkan countries: Albania, Bosnia & Herzegovina, Montenegro, North Macedonia, and Serbia. Historically, public sector employment has played a significant role in these nations due to their centralized market past. Despite labor market reforms, the public sector remains a major employer, driven by persistently high unemployment rates, especially among youth, and ongoing net emigration. Using panel data from 2006 to 2022, this study examines the impact of GDP per capita, trade openness, urbanization, population, age dependency, and institutional variables on public sector employment. The findings reveal that while economic growth (GDP per capita) positively influences public sector employment, driven by redistributive policies and the need to manage economic complexity, trade openness, and population size are associated with a decline in the public employment rate, indicating a gradual shift toward private sector-driven economies. The nuanced relationship between urbanization and public sector employment further highlights the transformative potential of governance improvements in fostering labor market efficiency and reducing dependency on the public sector. Most importantly, institutional variables emerge as critical in shaping these dynamics, with higher government effectiveness and increased corruption control strongly influencing higher public sector employment, driven by enhanced trust in institutions and expanded public service roles.