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Are government wages interlinked with private sector wages?

  • Lamo, Ana
  • Pérez, Javier J.
  • Schuknecht, Ludger

The ongoing fiscal and financial crisis with significant macroeconomic imbalances in the euro area raises the question in how far public–private wage interaction and even wage spirals contribute to fiscal and competitiveness problems. In this vain we analyse empirically whether the evolution of public sector wages is decoupled from that of the private sector. Using data for number of OECD countries, we find: (i) a strong and extremely robust positive annual contemporaneous correlation of public and private sector wages over the business cycle; (ii) evidence of co-movement of these variables over the medium and long run. From a policy perspective, the findings of this study suggest public wage restraint and private wage flexibility coupled—where needed—with institutional reform to prevent or break public–private wage spirals.

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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 35 (2013)
Issue (Month): 5 ()
Pages: 697-712

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Handle: RePEc:eee:jpolmo:v:35:y:2013:i:5:p:697-712
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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