The cyclicality of consumption, wages and employment of the public sector in the euro area

Abstract

This study empirically examines the business cycle behaviour of public consumption and its main components, the public wage bill (including its breakdown into compensation per employee and public employment) and intermediate consumption, in the euro area aggregate, euro area countries and a group of selected non-euro area Organization for Economic Co-operation and Development (OECD) countries (Denmark, Sweden, the UK, Japan and the US). It looks across a large number of variables and methods, using annual data from 1960 to 2005. It finds robust evidence supporting that public consumption, wages and employment co-move with the business cycle in a pro-cyclical manner with 1–2 year lags, notably for the euro area aggregate and euro area countries. The findings reflect mainly the correlation between cyclical developments, but also point to an important role of pro-cyclical discretionary fiscal policies.