Abstract
This study seeks to uncover the role played by the public sector wage premium in explaining the output volatility. Furthermore, the study also explores the factors that might substantiate the cross-country differences in the volatility of the public sector wage premium. Using cross-sectional regression analysis for the European Union countries, the findings indicate that more volatile public sector wage premium is associated with higher fluctuations in the private sector employment and less stable growth. Findings also suggest that volatility of the public sector wage premium tends to be larger in countries with smaller governments and in countries where collective bargaining is the predominant regime for public sector wage setting.
Highlights
In most advanced economies public sector makes up for a notable fraction of the total employment
Using the data for EU member states over the period 1995–2016 this study investigates whether fluctuations in the public sector wage premium increase the volatility of the private sector employment and amplify the output volatility
This study adds to existing literature by focusing on the volatility instead of the magnitude of the public sector wage premium
Summary
In most advanced economies public sector makes up for a notable fraction of the total employment. It has been shown that private sector wages and employment are very responsive to changes in public sector wages (European Commission, 2014) and that an increase in public sector wages may have negative side-effects e.g. loss of international competitiveness (Lane & Perotti, 2003), reduced private sector profitability (Alesina, Ardagna, Perotti, & Schiantarelli, 2002) and lower productivity (Kollintzas et al, 2015) The findings are robust if the total employment is used instead of the private sector employment, which rules out the possibility that private sector jobs are perfectly “crowded out” by public sector jobs Considering these adverse effects, the study investigates factors that might contribute to the volatility of the public sector wage premium.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
