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Public and private sector wages interactions in a general equilibrium model

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Author Info

  • Gonzalo Fernández-de-Córdoba
  • Javier Pérez

    ()

  • José Torres

Abstract

This paper develops a dynamic general equilibrium model in which the public and the private sector interact in the labor market. Previous studies that analyze the labor market effects of public sector employment and wages have mostly assumed exogenous rules for public wage and public employment. We show that theories that equalize wages with marginal products in the private sector can rationalize the interaction of public and private sector wages when extended to accommodate a non-trivial government sector/public sector union that endogenously determines public employment and wages. Our model suggests a positive correlation between public and private sector wages. Any increase in tax revenues, coupled with the existence of a positive public-private sector wage gap, makes working in the public sector an attractive option. Thus, a positive neutral productivity shock increases public and private sector wages. More interestingly, even a private-sector specific productivity shock spills-over to the public sector, increasing public wages. These facts lend some support to the wage leading role of the private sector. Nevertheless, at the same time, a positive shock to public sector wages would lead to an increase in private sector wages, via the flow of workers from the private to the public sector.

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Bibliographic Info

Article provided by Springer in its journal Public Choice.

Volume (Year): 150 (2012)
Issue (Month): 1 (January)
Pages: 309-326

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Handle: RePEc:kap:pubcho:v:150:y:2012:i:1:p:309-326

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Web page: http://www.springerlink.com/link.asp?id=100332

Related research

Keywords: Public wages; Public employment; Labor market; Trade unions; J30; J45; J51; J52; E62; H50;

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References

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Citations

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Cited by:
  1. Javier Pérez, 2010. "Discussion of the paper “A rational expectations model for simulation and policy evaluation of the Spanish economy”," SERIEs, Spanish Economic Association, vol. 1(1), pages 171-173, March.
  2. George Economides & Apostolis Philippopoulos & Vangelis Vassilatos, 2011. "Public Providers, versus Private Providers, of Public Goods: A General Equilibrium Study of the Role of the State," CESifo Working Paper Series 3487, CESifo Group Munich.
  3. Gonzalo F De córdoba & Javier J Pérez & José L Torres, 2012. "On the substitutability between public and private employment," Economics Bulletin, AccessEcon, vol. 32(3), pages 2700-2709.

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