The Effect of Public Sector Relocations on Regional Development in Germany

Can governments create private sector jobs in lagging regions by relocating public sector employees? I study a program moving about 5,200 public sector jobs from thriving cities to lagging towns in one of Germany’s largest states. Linked employer-employee data show that the jobs move, but incumbent workers largely do not. Comparing receiving locations with entropy-balanced municipalities in other states that are eligible under the program’s rule, and sending locations with synthetic controls, I find that receiving locations gain about 1.7 private jobs per public job and sending locations also gain private employment. A quantitative spatial model rationalizes these effects. Sending locations lose public-to-private spillovers but gain from larger private-to-private spillovers and freed city-center office space. Receiving locations, with smaller private sectors, gain from public-to-private spillovers. A 10 percent increase in nearby public employment density raises private productivity by about 0.4 percent. The policy slightly raises welfare.