Government employees make up a significant portion of the workforce and have high union membership rates in both Canada and the United States. To understand how this impacts the macroeconomy I investigate the relationship between public sector unions (PSUs) and the private sector. Synthesizing previous research, I establish that PSUs can lead to ”crowding out” of private labour and increase government labour costs. The effects of this on the private sector through labour reductions and distortionary tax increases are formalized in a neoclassical growth model. Using literature estimates of model parameters I estimate a range of quantitative effects through different causal pathways, from a 0.4% decrease in capital and output to a 5.2% decrease in capital and 1.7% decrease in output. I then use company and state level data to look at the effects of PSUs empirically with a two-way fixed effects approach, and find insignificant results.
