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Public and private sector wages: co-movement and causality

Listed author(s):
  • Lamo, Ana
  • Schuknecht, Ludger
  • Pérez, Javier J.

This paper looks at public and private sector wages interactions since the 1960s in the euro area, euro area countries and a number of other OECD countries. The paper reports, first, a strong positive annual contemporaneous correlation of public and private sector wages over the business cycle; this finding is robust across methods and measures of wages and quite general across countries. Second, we show evidence of long-run relationships between public and private sector wages in all countries. Finally, causality analysis suggests that feedback effects between private and public wages occur in a direct manner and, importantly also via prices. While influences from the private sector appear on the whole to be stronger, there are direct and indirect feedback effects from public wage setting in a number of countries as well. We show how country-specific institutional features of labour and product markets contain helpful information to explain the heterogeneity across countries of our results on public/private wage leadership. JEL Classification: C32, J30, J51, J52, E62, E63, H50

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Paper provided by European Central Bank in its series Working Paper Series with number 963.

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Date of creation: Nov 2008
Handle: RePEc:ecb:ecbwps:2008963
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  1. Luca Nunziata, 2005. "Institutions and Wage Determination: a Multi-country Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 435-466, 08.
  2. Philip Du Caju & Erwan Gautier & Daphne Momferatu & Melanie Ward-Warmedinger, 2009. "Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 12(2), pages 57-108, Winter.
  3. J. Lindquist & Roger Vilhelmsson, 2006. "Is the Swedish central government a wage leader?," Applied Economics, Taylor & Francis Journals, vol. 38(14), pages 1617-1625.
  4. Camacho, Maximo & Perez-Quiros, Gabriel & Saiz, Lorena, 2006. "Are European business cycles close enough to be just one?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1687-1706.
  5. Calmfors, Lars & Horn, Henrik, 1986. "Employment Policies and Centralized Wage-Setting," Economica, London School of Economics and Political Science, vol. 53(211), pages 281-302, August.
  6. Holmlund, Bertil, 1993. "Wage setting in private and public sectors in a model with endogenous government behavior," European Journal of Political Economy, Elsevier, vol. 9(2), pages 149-162, May.
  7. Demekas, Dimitri G & Kontolemis, Zenon G, 2000. " Government Employment and Wages and Labour Market Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(3), pages 391-415, July.
  8. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
  9. Jacobson, Tor & Ohlsson, Henry, 1994. "Long-Run Relations between Private and Public Sector Wages in Sweden," Empirical Economics, Springer, vol. 19(3), pages 343-360.
  10. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
  11. Ana Lamo & Javier J. Pérez & Ludger Schuknecht, 2013. "The cyclicality of consumption, wages and employment of the public sector in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(12), pages 1551-1569, April.
  12. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
  13. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  14. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  15. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
  16. Gayle Allard, 2005. "Measuring job security over time: in search of a historical indicator for EPL," Working Papers Economia wp05-17, Instituto de Empresa, Area of Economic Environment.
  17. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.
  18. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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  21. Kent Friberg, 2007. "Intersectoral wage linkages: the case of Sweden," Empirical Economics, Springer, vol. 32(1), pages 161-184, April.
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