The Economic Crisis, Public Sector Pay, and the Income Distribution
AbstractAn important aspect of the impact of the economic crisis is how pay in the public sector responds – in the face not only of the evolution of pay in the private sector, but also extreme pressure on public spending (of which pay is a very large proportion) as fiscal deficits soar. What are the effects on the income distribution of cutting public sector pay rates or alternative strategies to reduce the public sector pay bill, and how does these vary depending on the evolution of pay in the private sector? This paper investigates these issues using data and a tax-benefit simulation for Ireland, a country which faces a particularly severe fiscal crisis and where innovative measures have already been implemented to claw back pay from public sector workers in the guise of a "pensions levy", followed most recently by a significant cut in nominal pay rates. The SWITCH tax-benefit model first allows the distributional effects of these measures, which achieved a substantial reduction in the net public sector pay bill, to be teased out. The overall impact on the income distribution, set against alternative scenarios for pay in the private sector, is assessed. This provides empirical evidence relevant to policy choices in relation to a key aspect of household income over which governments have direct influence, while at the same time illustrating methodologically how a tax-benefit model can serve as the base for such investigation.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4948.
Length: 19 pages
Date of creation: May 2010
Date of revision:
Publication status: published in: Research in Labor Economics, 2011, 32, 207-225
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Other versions of this item:
- Callan, Tim & Nolan, Brian & Walsh, John R., 2010. "The Economic Crisis, Public Sector Pay, and the Income Distribution," Papers WP344, Economic and Social Research Institute (ESRI).
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
- J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
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- Kelly, Eilish & McGuinness, Seamus & O'Connell, Philip, 2009.
"Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland,"
The Economic and Social Review,
Economic and Social Studies, vol. 40(3), pages 339â370.
- Kelly, Elish & McGuinness, Seamus & O'Connell, Philip J., 2008. "Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland," Papers WP270, Economic and Social Research Institute (ESRI).
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- Boyle, Gerry & McElligott, Rory & O'Leary, Jim, 2004. "Public-Private Wage Differentials in Ireland, 1994-2001," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2004(2-Summer), pages 1-23.
- Kelly, Elish & McGuinness, Seamus & O'Connell, Philip J., 2009. "The Public-Private Sector Pay Gap in Ireland: What Lies Beneath?," Papers WP321, Economic and Social Research Institute (ESRI).
- Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Pension Policy: New Evidence on Key Issues," Research Series, Economic and Social Research Institute (ESRI), number RS14.
- Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Tax Reform: Selected Issues," Book Chapters, in: Callan, Tim (ed.), Budget Perspectives 2010, pages 3-18 Economic and Social Research Institute (ESRI).
- Bargain, Olivier & Melly, Blaise, 2008. "Public Sector Pay Gap in France: New Evidence Using Panel Data," IZA Discussion Papers 3427, Institute for the Study of Labor (IZA).
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2010. "Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," IZA Discussion Papers 4917, Institute for the Study of Labor (IZA).
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