Privatization, Yardstick Competition and Employment Dynamics: Evidence from Bangladesh

Abstract

We analyze the dynamics of public and private sector employment, using the natural experiment provided by the partial privatization of the Bangladeshi jute industry. A differences-in-differences approach allows us to infer ownership effects. Although the public sector had substantial excess employment of workers initially, this excess was substantially eroded by the end of the period we study. This finding is consistent with the idea that the central authorities, which were increasingly financially constrained, used yardstick competition to reduce public sector managerial rents. The extent of such erosion differs between white-collar and manual worker categories, with excess employment persisting only in the former.