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The fiscal and macroeconomic effects of government wages and employment reform

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  • Pérez, Javier J.
  • Rodríguez-Vives, Marta
  • Depalo, Domenico
  • Papapetrou, Evangelia
  • Aouriri, Marie
  • Campos, Maria M.
  • Celov, Dmitrij
  • Pesliakaitė, Jurga
  • Ramos, Roberto

Abstract

This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms. JEL Classification: H50, E62, J45

Suggested Citation

  • Pérez, Javier J. & Rodríguez-Vives, Marta & Depalo, Domenico & Papapetrou, Evangelia & Aouriri, Marie & Campos, Maria M. & Celov, Dmitrij & Pesliakaitė, Jurga & Ramos, Roberto, 2016. "The fiscal and macroeconomic effects of government wages and employment reform," Occasional Paper Series 176, European Central Bank.
  • Handle: RePEc:ecb:ecbops:2016176
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    1. repec:spr:izalpo:v:6:y:2017:i:1:d:10.1186_s40173-017-0086-0 is not listed on IDEAS
    2. Bandiera, Guilherme & Pappa, Evi & Sajedi, Rana & Vella, Eugenia, 2016. "Fiscal consolidation in a low inflation environment: pay cuts versus lost jobs," Bank of England working papers 628, Bank of England.
    3. Ferdinandusse, Marien & Checherita-Westphal, Cristina & Attinasi, Maria Grazia & Bańkowski, Krzysztof & Palaiodimos, Georgios & Trindade Campos, Maria Manuel, 2017. "Euro area fiscal stance," Occasional Paper Series 182, European Central Bank.
    4. Maria M. Campos & Domenico Depalo & Evangelia Papapetrou & Javier J. Pérez & Roberto Ramos, 2017. "Understanding the public sector pay gap," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-29, December.

    More about this item

    Keywords

    Fiscal consolidation; fiscal policies; labour market; public employment; public wages;

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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