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The Economic Crisis, Public Sector Pay, and the Income Distribution

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Author Info

  • Callan, Tim

    ()
    (Economic and Social Research Institute, Dublin)

  • Nolan, Brian

    ()
    (University College Dublin)

  • Walsh, John R.

    ()
    (ESRI, Dublin)

Abstract

An 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 Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4948.

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Length: 19 pages
Date of creation: May 2010
Date of revision:
Publication status: published in: Research in Labor Economics, 2011, 32, 207-225
Handle: RePEc:iza:izadps:dp4948

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Keywords: income distribution; fiscal crisis; public sector pay;

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References

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  1. Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Pension Policy: New Evidence on Key Issues," Research Series, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), number RS14.
  2. 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), Economic and Social Research Institute (ESRI), vol. 2004(2-Summer), pages 1-23.
  3. Kelly, Elish & McGuinness, Seamus & O'Connell, Philip J., 2009. "The Public-Private Sector Pay Gap in Ireland: What Lies Beneath?," Papers, Economic and Social Research Institute (ESRI) WP321, Economic and Social Research Institute (ESRI).
  4. 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, Economic and Social Studies, vol. 40(3), pages 339–370.
  5. Gerry Boyle & Rory McElligott & Jim O'Leary, 2004. "Public-Private Wage Differentials in Ireland, 1994-2001," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n1421004, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  6. repec:esr:chaptr:jacb200961 is not listed on IDEAS
  7. 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).
  8. Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Tax Reform: Selected Issues," Papers, Economic and Social Research Institute (ESRI) BP2010/1, Economic and Social Research Institute (ESRI).
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Cited by:
  1. 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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