IDEAS home Printed from https://ideas.repec.org/p/erp/leqsxx/p0032.html
   My bibliography  Save this paper

The Revenge of Baumol’s Cost Disease?: Monetary Union and the Rise of Public Sector Wage Inflation

Author

Listed:
  • Alison Johnston

Abstract

Many political scientists and economists have addressed the implications of the public sector’s sheltered status on their unions’ wage strategies vis-à-vis the government. Since the public sector is a monopoly provider of necessary and price inelastic services, conventional wisdom suggests that public sector unions’ push for wage increases which their productivity does not merit, exacerbating inflation and fiscal deficits. The argument in this paper challenges this conventional view, and maintains that the recent, puzzling rise in public sector wage inflation, relative to that in manufacturing, in Euro-zone countries is an unintended result of the institutional shift towards European Economic and Monetary Union (EMU). During the 1980s and 1990s, differences in wage inflation between the manufacturing and public sector within most EMU candidate-countries were low. After 1999, these differences significantly worsened; wage moderation continued in the manufacturing sector while wage inflation arose in the public sector. It is argued here that monetary union’s predecessors, the European Monetary System and Maastricht regimes, imposed two important constraints on public employers, which enhanced their ability to enforce wage moderation: the commitment to a hard currency policy via participation in the Exchange Rate Mechanism, adopted by some earlier than others and, the Maastricht criteria. Monetary union’s removal of these two constraints weakened public employers’ capability to deny inflationary wage settlements to public sector unions. Panel regressions results outline a statistically significant relationship between monetary union and higher levels of wage inflation in the public sector, relative to manufacturing. The paper concludes with a brief discussion of the implications of monetary union for inter-sectoral dynamics.

Suggested Citation

  • Alison Johnston, 2011. "The Revenge of Baumol’s Cost Disease?: Monetary Union and the Rise of Public Sector Wage Inflation," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 2, London School of Economics / European Institute.
  • Handle: RePEc:erp:leqsxx:p0032
    as

    Download full text from publisher

    File URL: http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper32.pdf
    File Function: Full text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Alberto Alesina & Silvia Ardagna & Vincenzo Galasso, 2011. "The Euro and Structural Reforms," Review of Economics and Institutions, Università di Perugia, vol. 2(1).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    employment policy; trade unions; sectoral governance; EMU; EMU;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erp:leqsxx:p0032. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Katjana Gattermann). General contact details of provider: http://www2.lse.ac.uk/europeanInstitute .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.