27 public sector labor rather than the supply, labor's revealed preference for public sector employment, or both. In either case, the distorting effects on labor markets remain.

Three lessons can be drawn from this review about the effects of public sector pay and employment policies on labor markets. The first is that policies do matter -- each intervention has to be weighed in terms of economic and social costs and benefits to everyone. The effect of any policy may or may not be measurably distorting, but the cumulative effect over time of a large and inflexible public sector can be clearly segmenting, and thus detrimental for the entire economy. The prospects for inflexible economies are less than bright for three reasons: continuing fiscal and demographic pressures; a continuing need for flexible response to rapidly changing economic circumstances; and a parallel shift in many countries away from command economies toward more open, market-oriented systems. Thus, both macroeconomic and public sector policies that reduce flexibility and introduce segmentation between the formal and informal -- or covered and uncovered -- sectors need to be examined with care. Also, mere desegmentation is not enough -- the provision of appropriate education and training is an essential component of labor mobility.

The second lesson is that the analysis of presumed distortions mist be approached cautiously-simple theory and aggregate data do not always provide adequate explanations. The World Bank has been the most active participant in the collection and analysis of data, and the design of programs to address public sector imbalances. Still, more applied research would provide a better data base upon which to build the policy dialogue with governments. What is the nature and extent of labor market segmentation? How do government policies -- singularly and collectively -- contribute to segrnentation? How do macroeconomic and labor market reforms affect one another? One problem is that even when civil service data are comprehensive and accurate, there is limited information about comparable private sector opportunities and about the absorptive capacity of the private sector -- formal and informal. More public-private comparisons are needed-that which take into account job security, hours worked, pensions, and other benefits. The use of earnings functions would shed light on how changes in education, experience, skill, and other human resource parameters are related to changes in the aggregate wage. There is also limited information about the intended and actual functions of labor market institutions and about policies -- short-term compensatory and long-term -- that would aid the institutions' flexibility in responding to changing circumstances. Both of these issues are being addressed in recent countryspecific analyses, but more work is needed.

The final lesson is that public sector labor market institutions and policies do not exist in a narrow economic context. The slow pace of public sector reform programs has perhaps demonstrated that it is the underlying attitudes that are rigid. Public sector labor market interventions reflect these attitudes, so their selective removal will be necessary -- but not sufficient -- for sustainable reforms. Measures to reduce public sector wage compression or levels of employment have largely been and will continue to be-half-heartedly implemented unless the underlying presumptions about wage equalization and the social value of public employment are addressed.