The impact of austerity measures on the public - private sector wage gap in Europe

Abstract

Considering the year prior to the international and sovereign crises (2007) as a benchmark and studying all years until the crises receded (2013) in most of the 31 countries available in the European Union Survey of Income and Living Conditions (EU SILC), we examine the impact of public sector pay reforms on the public-private sector wage gap. We do so at the mean and along quantiles of the wage distributions, using decomposition methods to identify the explained and unexplained components of the gap. We code the pay reforms in the 31 countries into the categorical variables Freeze and Cut and consider their impact on quantile features of the wage gap using static and dynamic panel methods. Robust estimates suggest that public sector freezes and/or cuts had negative and statistically significant effects on the unexplained public-private sector gap, particularly evident at the median and the 90th quantile. At the 10th quantile, the impact of the measures was positive but statistically weaker. The 90th minus 10th quantile effects are negative, reflecting attempts by many countries to protect the low-paid, regardless of the initial public-private pay gap for this group. Countries which received external financial assistance had high pay gaps before the crises and displayed a variety of adjustments during the crises.