Public Sector Wage Bargaining, Unemployment, and Inequality
In many countries, the government pays almost identical nominal wages to workers living in regions with notable economic disparities. In most cases this is the result of highly centralized pay systems. By developing a two-region general equilibrium model with unions and search frictions in the labour market, I study the differences in terms of unemployment, real wages, and inequality between a regional wage bargaining process and a national one in the public sector. Adopting the former lowers public sector real salaries but it also decreases unemployment and jacks up private sector real earnings. Simulations conducted on the basis of Italian data show that, compared to a national negotiation process, a regional one also increases inequality both within and between regions.
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