Did the crisis make the Greek economy less inefficient? Evidence from the structure and dynamics of sectoral premia

It is generally understood that the Greek economy has long been characterised by a range of structural and institutional inefficiencies – which, arguably, are at least partly responsible for the crisis that engulfed the country since 2009. In turn, the crisis has also led to a significant adjustment of the Greek economy, both behaviourally (e.g., with regard to labour supply) and institutionally (e.g., with regard to labour market regulations). In this paper we ask whether this adjustment has helped resolve some of the inefficiencies that characterised the Greek economy in the past. We focus on the particular case of sectoral wage premia and examine (a) whether these did indeed reflect economic inefficiency in the past and (b) whether they have declined systematically since the crisis. Sectoral wage premia are generally linked to unobserved worker heterogeneity and compensating differentials (in a competitive framework) or to market distortions, such as monopsony power or information asymmetries (in an imperfect markets framework). Our results show that sectoral premia in Greece are only weakly linked to unobserved worker heterogeneity, but strongly linked to non-competitive factors reflecting market inefficiency. Looking at three such factors – the availability of rents (as measured by sectoral profitability), the potential for rents (measured via a proxy for intra-sectoral competition) and workers’ ability to extract such rents (measured by the share of public sector jobs) – we find that the crisis altered the relative contribution of such factors but did not lead to a decline in sectoral premia on the whole. Indeed, wage premia appear to have increased in the least competitive sectors while the overall disparity of wages across sectors increased. We conclude that market inefficiencies, as manifested by the presence of unaccounted-for sectoral wage differentials, intensified despite all policy efforts in the opposite direction.