Public sector wage bargaining and the balanced growth model: Denmark and Sweden compared

Denmark and Sweden are small open economies that rely on exports for economic growth. At the same time, these countries have some of the largest public sectors in the world and a high wage equality. With extensive collective bargaining and strong unions in both private and public sectors, coordination of wage setting is crucial for balancing competitiveness and real wage increases. This paper investigates how coordination between public sector and private sector wage setting in the two countries is achieved. Like other studies, we find that agreements in the manufacturing export sector set the pattern for public sector wage bargaining. However, we also find that institutional differences have significant distributive implications for public sector employees. In Denmark, wage increase disparities between the public and private sectors are automatically adjusted according to formalized procedures. In Sweden, no automatic adjustment exists, and coordination is instead based on tightly coordinated bargaining practices by unions and public sector employers. Surprisingly, we find most public sub-sector variation of wage increases in Denmark, whereas wage structures in Sweden have been very stable. We argue that timing of bargaining, level of private sector wage flexibility and politicization of public sector bargaining are key drivers for these distributional differences.