Co-movements between public and private wages in the EU: what factors and with what policy implications?

Benedicta Marzinotto,Alessandro Turrini

doi:10.1186/s40174-016-0074-1

Benedicta Marzinotto, Alessandro Turrini

Open Access

https://doi.org/10.1186/s40174-016-0074-1

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Abstract

This paper assesses the relationship between public and private wages in the EU, as measured by general government and manufacturing compensations, respectively. We find that the long-run relation between the two is stronger when the government is a large employer. Manufacturing compensations are better aligned with productivity and unemployment when general government compensations, to which they generally respond, are set through bargaining. Finally, manufacturing compensations react in the same way whether those in the general government sector are increased or cut, a relation that seems to hold also under fiscal consolidation provided the government is a large employer.JEL Classification: C32, E24, E62, H59

Highlights

The Euro debt crisis has revived interest in the relation between fiscal policy and the labour market
We find that general government compensations exercise a long-term impact on manufacturing compensations that is stronger for large public sectors
Having classified countries based on the prevailing public wage setting mode, we find that the size of the spill over from the government to the tradable sector is not affected by public wage setting neither in the long nor in the short run, but manufacturing compensations are better aligned with productivity and more responsive to unemployment when government compensations, to which private sector compensations respond, are set via bargaining

Summary

Introduction

The Euro debt crisis has revived interest in the relation between fiscal policy and the labour market. This paper assesses the relationship between public and private wages, as measured by general government and manufacturing nominal compensations, respectively, on a sample of 17 European Union (EU) countries from 1980 to 2013 applying dynamic ordinary least squares (DOLS) to panel data for the long-run and an error correction model (ECM) for the short run.

Results

Conclusion