Public Enterprises and Labor Market Performance

This paper shows that state control of some industries may have contributed to the increase in European unemployment from the 1970s to the early 1990s. We develop a simple two-sector model, one privately-run and one publicly-run, that has risk-averse workers directing their search into one of the sectors. Assuming that the privately-run sector is less able to insure its employees against uncertainty, we show that aggregate unemployment in this economy increases in response to an increase in economic turbulence.