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American Economic Review: Vol. 99 No. 5 (December 2009)


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Direct Democracy and Public Employees

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Matsusaka, John G. 2009. "Direct Democracy and Public Employees." American Economic Review, 99(5): 2227-46.

DOI: 10.1257/aer.99.5.2227


In the public sector, employment may be inefficiently high because of patronage, and wages may be inefficiently high because of public employee interest groups. This paper explores whether the initiative process, a direct democracy institution of growing importance, ameliorates these political economy problems. In a sample of 650+ cities, I find that when public employees cannot bargain collectively and patronage could be a problem, initiatives appear to cut employment but not wages. When public employees bargain collectively, driving up wages, the initiative appears to cut wages but not employment. The employment-cutting result is robust; the wage-cutting result survives some but not all robustness tests. (JEL D72, J31, J45, J52)

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Matsusaka, John G. (U Southern CA, Los Angeles)

JEL Classifications

D72: Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
J31: Wage Level and Structure; Wage Differentials
J45: Public Sector Labor Markets
J52: Dispute Resolution: Strikes, Arbitration, and Mediation; Collective Bargaining

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