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What goes up must come down -- cyclicality in public wage bill spending

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  • Eckardt, Sebastian
  • Mills, Zachary
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    Abstract

    This paper analyzes the cyclicality of public sector wage bill spending in Europe and Central Asia and assesses the impact of wage bill spending on fiscal discipline before, during, and after the global financial crisis of 2008/09. While there are important differences across countries, the results show that public sector wage bill spending tends to behave strongly pro-cyclically, especially in transition economies. Moreover, while wage bill spending is pro-cyclical during both good and bad times, adjustments during economic downturns tend to be sharper than expansions during periods of economic booms. In addition, there is evidence of political cycles, with stronger wage bill growth in pre-election periods. Finally, the analysis reveals that while the size of the wage bill does not seem to systematically affect fiscal discipline across countries, expansions within countries over time are associated with deteriorating fiscal positions. These findings provide a strong impetus for public wage and employment policies that aim to restrain excessive growth of the wage bill during boom periods. This prospective management of the wage bill would not only reduce the need for painful adjustments during periods of fiscal consolidation, but also contribute to strengthening the overall countercyclical and stabilizing impact of fiscal policies.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6760.

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    Date of creation: 01 Jan 2014
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    Handle: RePEc:wbk:wbrwps:6760

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    Keywords: Currencies and Exchange Rates; Public Sector Expenditure Policy; Public Sector Economics; Labor Markets; Public Sector Management and Reform;

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    1. Schuknecht, Ludger, 2000. " Fiscal Policy Cycles and Public Expenditure in Developing Countries," Public Choice, Springer, Springer, vol. 102(1-2), pages 115-30, January.
    2. Alberto Alesina & Stephan Danninger & Massimo Rostagno, 1999. "Redistribution Through Public Employment: The Case of Italy," NBER Working Papers 7387, National Bureau of Economic Research, Inc.
    3. Brender, Adi, 2003. "The effect of fiscal performance on local government election results in Israel: 1989-1998," Journal of Public Economics, Elsevier, Elsevier, vol. 87(9-10), pages 2187-2205, September.
    4. Matz Dahlberg & Eva Mörk, 2011. "Is there an election cycle in public employment? Separating time effects from election year effects," Working Papers 2011/8, Institut d'Economia de Barcelona (IEB).
    5. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    6. Grigoli, Francesco & Mills, Zachary & Verhoeven, Marijn & Vlaicu, Razvan, 2012. "MTEFs and fiscal performance: panel data evidence," Policy Research Working Paper Series 6186, The World Bank.
    7. Adi Brender & Allan Drazen, 2004. "Political Budget Cycles in New versus Established Democracies," NBER Working Papers 10539, National Bureau of Economic Research, Inc.
    8. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, StataCorp LP, vol. 9(1), pages 86-136, March.
    9. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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