Working hours, income volatility and public sector employment as insurance

Poorer economies tend to have higher working hours per adult due to the income effect. However, when controlling for resource abundance and public sector employment, the income effect weakens. We present a simple model to explain this phenomenon: in resource-rich economies where income is volatile and public and private social insurance are absent, individuals prefer more secure public sector jobs, even if they offer lower wages than the private sector. In equilibrium, the wage gap is equal to the insurance premium, and individuals work longer hours to compensate for the loss in income. Recent data on working hours support this hypothesis: a higher share of public sector employment in resource-rich economies is associated with longer working hours along both the extensive and intensive margins.