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The Economic Crisis, Public Sector Pay, and the Income Distribution


  • Callan, Tim
  • Nolan, Brian
  • Walsh, John R.


An important aspect of the impact of the economic crisis is how pay in the public sector responds - in the face not only of the evolution of pay in the private sector, but also extreme pressure on public spending (of which pay is a very large proportion) as fiscal deficits soar. What are the effects on the income distribution of cutting public sector pay rates or alternative strategies to reduce the public sector pay bill, and how do these vary depending on the evolution of pay in the private sector? This paper investigates these issues using data and a tax-benefit simulation for Ireland, a country which faces a particularly severe fiscal crisis and where innovative measures have already been implemented to claw back pay from public sector workers in the guise of a "pensions levy", followed most recently by a significant cut in nominal pay rates. The SWITCH tax-benefit model first allows the distributional effects of these measures, which achieved a substantial reduction in the net public sector pay bill, to be teased out. The overall impact on the income distribution, set against alternative scenarios for pay in the private sector, is assessed. This provides empirical evidence relevant to policy choices in relation to a key aspect of household income over which governments have direct influence, while at the same time illustrating methodologically how a tax-benefit model can serve as the base for such investigation.

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  • Callan, Tim & Nolan, Brian & Walsh, John R., 2010. "The Economic Crisis, Public Sector Pay, and the Income Distribution," Papers WP344, Economic and Social Research Institute (ESRI).
  • Handle: RePEc:esr:wpaper:wp344

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    References listed on IDEAS

    1. Gerry Boyle & Rory McElligott & Jim O'Leary, 2004. "Public-Private Wage Differentials in Ireland, 1994-2001," Economics, Finance and Accounting Department Working Paper Series n1421004, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    2. Bargain, Olivier & Melly, Blaise, 2008. "Public Sector Pay Gap in France: New Evidence Using Panel Data," IZA Discussion Papers 3427, Institute for the Study of Labor (IZA).
    3. Kelly, Elish & McGuinness, Seamus & O'Connell, Philip J., 2009. "The Public-Private Sector Pay Gap in Ireland: What Lies Beneath?," Papers WP321, Economic and Social Research Institute (ESRI).
    4. Boyle, Gerry & McElligott, Rory & O'Leary, Jim, 2004. "Public-Private Wage Differentials in Ireland, 1994-2001," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2004(2-Summer), pages 1-23.
    5. Kelly, Eilish & McGuinness, Seamus & O'Connell, Philip, 2009. "Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 40(3), pages 339-370.
    6. repec:esr:chaptr:jacb200961 is not listed on IDEAS
    7. Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Tax Reform: Selected Issues," Papers BP2010/1, Economic and Social Research Institute (ESRI).
    8. Callan, Tim & Keane, Claire & Walsh, John R., 2009. "Pension Policy: New Evidence on Key Issues," Research Series, Economic and Social Research Institute (ESRI), number RS14.
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    Cited by:

    1. Philip O’Connell, 2013. "Cautious adjustment in a context of economic collapse: The public sector in the Irish crises," Chapters,in: Public Sector Shock, chapter 9, pages 337-370 Edward Elgar Publishing.
    2. repec:eme:rleczz:s0147-9121(2011)0000032011 is not listed on IDEAS
    3. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2010. "Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," IZA Discussion Papers 4917, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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