Abstract
In this paper, using a dynamic panel of 21 OECD countries, we find that, unlike the other OECD countries in the sample, wage setting institutions, competition conditions, public finances, and external imbalances can account for the behavior of the public sector wage premium (WPR) and the self-employed taxation gap (TSL) in Greece and to a lesser extent in Spain and Portugal, in a manner that is consistent with an “insider–outsider society” (IOS). That is, a politicoeconomic system characterized by groups of selfish elites that enjoy market power but at the same time cooperate in influencing government in protecting and promoting their collective self-interests. Then, we find that for Greece as well as Spain and Portugal, WPR and TSL have an adverse effect on both TFP and output growth. Finally, the effect of WPR and TSL on the business cycle (shock propagation mechanism) is investigated via a panel VAR analysis. Again, impulse response function analysis suggests that the shock propagation mechanisms of WPR and TSL for Greece and to a lesser extent for Spain and Portugal are quite different from the rest of the OECD countries. For example, in Greece, unlike the other OECD countries in the sample, a positive temporary shock in WPR causes TFP and output to fall and the public and current account deficits to increase. We take the TFP/output growth and the shock propagation mechanism results to provide strong evidence that Greece and to a lesser extent Spain and Portugal behave like IOS. For that matter, these results are important in order to understand the Greek crisis.
Highlights
We investigate whether there is formal empirical support for the view that the reason Greece’s growth and business cycle behavior is different than the OECD is because its politicoeconomic system behaves like the insider–outsider society of the theory, unlike that of most OECD countries
We find substantial evidence that the relationship between wage premium (WPR) and the self-employed over labor income (TSL) and a number of explanatory variables commonly used in the literature is different in Greece relative to other OECD country groups and most importantly that these differences are consistent with the insider–outsider society” (IOS) theory
These stylized facts are consistent with the “insider–outsider society” politicoeconomic system, characterized by groups of elites with each one of these elites enjoying market power, ignoring the effects of their actions on the rest of society
Summary
We start by introducing two country dummies, one for Greece and one for the Spain-Portugal group, and estimate the following equation using panel least squares: Zit 1⁄4 α þ Xit0b1 þ Y it0b2 þ DUM0Xit0γ1 þ DUM0Y it0γ2 þ uit; i 1⁄4 1; ...N ; t 1⁄4 1; ...; T ð4Þ where i denotes the country and t the time index, α is a constant, Zit is either WPR or TSL, Xit is a vector of exogenous variables not directly related to IOS theory (i.e., demographic factors and the state of the business cycle), Y j it is a vector of exogenous variables directly related to IOS theory (labor institutions, competition/regulation conditions, political institutions, public finances and external imbalances), and DUM′. A similar picture emerges by comparing the actual and counterfactual responses of a shock in TSL
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