When talking about the impact of a recession, people often mention the private and public sectors. But what do those terms really mean? They are used to compare different types of organizations in the U.S. economy and how they operate.
Businesses that make a profit commonly represent the private sector, while government agencies tend to represent the public sector. Learn how the private and public sectors operate, why they matter, and more.
How Do the Public Sector and Private Sector Work?
Economies of countries are divided between public and private sectors (or sections), for the purpose of considering economic activity and each contribution to domestic production (the GDP).
In the U.S. there are several agencies that track and report the activity of both the public and private sectors. For example, the Bureau of Labor Statistics (BLS) reports on market activity, working conditions, and price changes in the economy, whereas the U.S. Census Bureau provides data about the nation’s people and the economy.
How the Private Sector Works
The private sector is made up of households, businesses, and organizations, spanning jobs in a variety of fields, such as retail, construction, and manufacturing. This sector includes both public and private companies, ranging from behemoths like Walmart and Amazon, to small, mom-and-pop operations.
As private-sector businesses are owned and managed by private individuals or enterprises, businesses within this category focus on entrepreneurial activities, taking risks to create jobs and generate a profit. They are competitive and they have an incentive to be efficient.
How the Public Sector Works
The public sector references all government organizations, including the federal government, states, and localities. Public-sector organizations focus on services to the public as a whole, including education, welfare, the legal system, employment, natural resources, and health services.
Federal agencies like the IRS, FBI, and the Department of Labor, as well as state services like unemployment benefits, children and family services, and insurance regulation, are all part of the public sector. In practice, the Bureau of Economic Analysis and the Federal Reserve Board use data from the public sector to measure the nation’s financial and economic performance, while local and state agencies use the data to create budgets and programming.
Some government agencies operate as “corporations.” These agencies are established by Congress to provide public services at market prices, and to balance revenue and expenses. Examples are the U.S. Postal Service and the Federal Deposit Insurance Corp. (FDIC).
How Nonprofits Work
Nonprofits are often classified separately from both the public and private sectors, often in a group referred to as the nonprofit sector, third sector, or voluntary sector, but the classification depends on each organization. Nonprofits can sometimes be included within the public sector, because they have public elements, like including volunteers. However, the BLS lists them with the private sector for employment purposes.
NGOs (non-government organizations), a type of nonprofit, are voluntary groups or institutions with a social mission that doesn’t have a connection to a government. Nonprofit organizations include international groups like the Red Cross and Doctors Without Borders, as well as organizations based in the U.S., like churches.
Nonprofits can be a public charity or a private foundation. Public charities like United Way and Community Foundations perform charitable work, while private foundations support public charities. Private foundations don’t solicit funds from the public. The Bill & Melinda Gates Foundation is an example of a private nonprofit.
Private Sector vs. Public Sector
Ownership
Individuals own private-sector businesses. For example, an individual or group of individuals might own a sole proprietorship or LLC, while shareholders own corporations. Governmental agencies aren’t owned by individuals; they are “owned” by and operate on behalf of the public.
Types of Goods Produced
Public goods, like national defense, benefit everyone equally. These goods are delivered by public-sector organizations and are paid for by taxes. Private goods, like food, vehicles, and homes or offices, benefit individuals and businesses, and only one person or business can consume a specific private good. They are paid for by individuals or businesses.
Some goods and services are best provided by the public sector to make sure that everyone benefits equally. Examples are mail service, public health services, schooling, and highway systems.
Employment
Employment differs between the public and private sectors. The Department of Labor distinguishes between the two types of employers for specific regulations like meal break requirements and labor laws (like the Occupational Safety and Health Act (OSHA), for example. The major employment law, the Fair Labor Standards Act (FLSA), covers only employees of private-sector companies—those engaged in interstate commerce, which is pretty much every business.
In the public sector, civil service employees—those who work for federal, state, or local government agencies—receive pay and benefits under different systems than private employees. Federal employees of the U.S. government, for example, work under the federal civil service system, which includes classifications of positions to ensure equal pay for equal work across all federal agencies.
In the private sector, employers have more flexibility. Each employer can set its own employment rules, as long as they abide by federal and state employment laws, like OSHA, wage and hour laws, and equal pay and benefits laws.
Efficiency and Productivity
Because private-sector businesses are focused on making a profit, they are often considered more productive and competitive. Public-sector organizations, on the other hand, are de facto monopolies. For example, most cities only have one police force, and the FBI is the only federal law enforcement agency.
As there’s no incentive to make a profit, public organizations tend to be less efficient and less productive. Still, public-sector organizations have an important role in the economy by providing public goods, reducing unemployment, and stabilizing the economy during recessions.