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Employment in the Public Sector

Author Info

  • Lorenzo Forni
  • Raffaela Giordano

Abstract

This paper presents a model of wage-employment determination in private and public sectors, which allows us to analyze the effects of different institutional arrangements on labor market equilibria. In particular, it focuses on how different degrees of coordination in decision processes affect hiring and wage setting outcomes. Cooperation in unions’ behavior results in wage increases and employment reduction in the private sector, whereas it induces wage moderation and employment expansion in the public sector. Not surprisingly, if public decision units do not fully internalize the aggregate budget constraint in their hiring processes, the public sector wage bill and the level of taxation increase, thus enhancing the crowding out effect on private employment. Such effect appears to be stronger in the presence of encompassing union behavior. An empirical analysis performed on a sample of OECD countries in the period 1960-2000 seems to support the main predictions of the model.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1085.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1085
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Keywords: public employment; wage bargaining; decentralization;

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  1. Lorenzo Forni, 2004. "Centralization of wage bargaining and the unemployment rate: revisiting the hump-shape hypothesis," Temi di discussione (Economic working papers) 492, Bank of Italy, Economic Research and International Relations Area.
  2. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public Employment and Labor Market Performances," Sciences Po publications info:hdl:2441/8846, Sciences Po.
  3. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
  4. Ehrenberg, Ronald G. & Schwarz, Joshua L., 1987. "Public-sector labor markets," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 22, pages 1219-1260 Elsevier.
  5. Yianos Kontopoulos & Roberto Perotti, 1999. "Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 81-102 National Bureau of Economic Research, Inc.
  6. Pedro Portugal & Mário Centeno, 2001. "Wages of Civil Servants," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  7. Holmlund, B., 1991. "Wage Setting in Private and Public Sectors in a Model with Endogenous Government Behavior," Papers 1991i, Uppsala - Working Paper Series.
  8. Tito Boeri & Giuseppe Nicoletti & Stefano Scarpetta, . "Regulation and Labour Market Performance," Working Papers 158, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Gregory, Robert G. & Borland, Jeff, 1999. "Recent developments in public sector labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 53, pages 3573-3630 Elsevier.
  10. Holmlund, Bertil, 1997. "Macroeconomic Implications of Cash Limits in the Public Sector," Economica, London School of Economics and Political Science, vol. 64(253), pages 49-62, February.
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Cited by:

  1. Giordano, Raffaela & Depalo, Domenico & Coutinho Pereira, Manuel & Eugène, Bruno & Papapetrou, Evangelia & Pérez, Javier J. & Reiss, Lukas & Roter, Mojca, 2011. "The public sector pay gap in a selection of Euro area countries," Working Paper Series 1406, European Central Bank.
  2. Vasilev, Aleksandar, 2013. "Fiscal Policy in a Real-Business-Cycle Model with Labor-intensive Government Services and Endogenous Public Sector Wages and Hours," SIRE Discussion Papers 2013-82, Scottish Institute for Research in Economics (SIRE).
  3. Domenico Depalo & Raffaella Giordano, 2011. "The public-private pay gap: a robust quantile approach," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 70(1), pages 25-64, January.
  4. Afonso, António & Gomes, Pedro, 2008. "Interactions between private and public sector wages," Working Paper Series 0971, European Central Bank.
  5. Fernàndez-de-Córdoba, Gonzalo & Pérez, Javier J. & Torres, José L., 2009. "Public and private sector wages interactions in a general equilibrium model," Working Paper Series 1099, European Central Bank.
  6. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
  7. Anne Lauringson, 2010. "Measuring Union Bargaining Power In The Estonian Public Sector," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 72, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  8. Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2013. "Are government wages interlinked with private sector wages?," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 697-712.
  9. Eduardo Martínez Chombo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers 2009-07, Banco de México.
  10. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.

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