The public sector and the misallocation of labor: evidence from a policy experiment in India

State-owned enterprises are often thought to represent a distortion in the labor market, but the implied efficiency losses have not been carefully estimated. This paper presents the first rigorous quantification of the aggregate productivity effects of privatization of public sector enterprises. We study historical episodes of privatization of public sector firms in India over the period 1991-2005, and find evidence of reallocation of labor away from the public sector following privatization. In turn, this reallocation appears to result in a substantial improvement in aggregate productivity and output.