Does Slack Influence Public and Private Labor Market

We analyze the impact of public employment and wages’ policies on private labor market outcomes, in particular taking due account of the state of the economy. The literature has stressed, on the one hand, the “crowding-out” of private employment by public employment and, on the other, the signalling effect of public wages over private sector wages. These channels may operate differently in recessions than in expansions, and in high-unemployment instances than in normal times. We account for this possibility by means of, first, non-linear STVAR models and, second, local projection methods. We focus on Spanish and euro area aggregate data. Our results show that indeed allowing different reactions in different states of the economy is crucial for understanding the labor market impact of public employment and wages’ policy actions. In particular, we find that the degree of unemployment slack is key to determine if public employment crowds-out or crowds-in private employment. See above See above