While these three hypotheses might work well in explaining some facts about
public employment levels over time and across countries, none of these hypotheses
appears to provide a clear rationale for the structural dimension, that is, a relative change
of public employment at the subnational government level compared to that at the central
government level. Decentralization helps us to explain the change of the structural
dimension of public sector employment. With fiscal decentralization policy, the central
government transfers some responsibilities to the subnational governments. As a result,
we expect that the level of public sector employees at the central government level
decreases and that at the subnational government level increases with the degree of fiscal
decentralization. The overall impact of fiscal decentralization on total public sector
employment depends on these two opposing effects. If the magnitude of the reduction in
the central government employment overwhelms the increase in the subnational
government employment, then total public sector employment shrinks with the degree of
fiscal decentralization. In other words, the fiscal decentralization policy helps to retrench
the public sector employment. On the other hand, if the magnitude of the increase in the
subnational government employment overwhelms the reduction in the central
government employment, then total public sector employment grows with fiscal
decentralization. Both cases are supported by some hypotheses as we will discuss in
Chapter Two. Moreover, we also want to see what factors might affect the magnitudes of
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these two effects.