The optimal public employment policy

This paper studies optimal public employment in a model with two types of labor, unskilled and skilled, and a single consumption good. A linear income tax is used to redistribute income. It is shown that, if the income tax and public employment levels are optimal, then there is less unskilled labor and more skilled labor in public production than is necessary to minimize costs at the prevailing gross wage rates. The robustness of this result is investigated by examining a second model.