Public or Private Sector Wage Leadership? An International Perspective*

Abstract

Whether a government acts as a wage leader, placing pressure on private-sector wages (more open to competition), or whether it plays a passive role and merely follows wage negotiations in the private sector, there are important implications for macroeconomic development, particularly in small open economies and/or countries that are members of a monetary union, such as those of the European Monetary Union. With the notable exception of the case of Sweden, opinion on this issue is still divided. In this paper, we look at public-and privatesector wage interactions from an international perspective (18 OECD countries). We focus on the causal two-way relationship between public and private wage setting, confirming that the private sector, on the whole, appears to have a stronger influence on the public sector, rather than vice versa. However, we also find evidence of feedback effects from public wage setting, which affect private-sector wages in a number of countries. When the private sector takes the lead on wages, there are few feedback effects from the public sector, while public wage leadership is typically accompanied by private-sector feedback effects.

Co-movements between public and private wages in the EU: what factors and with what policy implications?

“…When testing it in the other direction, namely from manufacturing to general government compensations, it is found that the long-run elasticity of government with respect to manufacturing compensations is of 0.8%, thus much stronger than the 0.4% elasticity of manufacturing with respect to general government compensations. This confirms results from, for example, Lamo et al (2007Lamo et al ( ) (2012, where it is found that the private sector is more likely to have an impact on the public sector than vice versa, including in the long-run when covariates are accounted for. Secondly, in line with expectations, we find no difference between large and small government sectors; as a matter of fact, this dimension should be relevant only when it comes to assessing the impact of the public on the private traded sector.…”

“…They find that the interaction goes both ways and that each 1% increase in real public sector wage growth raises private sector real wage growth by 0.3%. Lamo et al (2007Lamo et al ( , 2012Lamo et al ( , 2013 use different statistical techniques to analyse co-movement in the short-, medium-and long-term but include also a causality test. They find strong crosssectoral correlation between public and private wages, with coefficients as high as 0.8.…”

“…For example, Lamo et al (2007Lamo et al ( , 2012 include public sector size amongst the variables that may affect the odds of public wage leadership and find that the government is more likely to Granger-cause private wages when it is a large employer. We differ from their approach in two respects.…”

The Fiscal and Macroeconomic Effects of Government Wages and Employment Reform

“…A wealth of recent empirical papers provides evidence of a direct causal relationship between these variables (HolmHadulla et al, 2010;Pérez and Sánchez, 2011;Lamo, Pérez and Schuknecht, 2012). While private wages tend to lead public wages in the long-run, for some countries bi-directional causality (i.e.…”

“…See for instance Alesina et al (2002), Afonso and Gomes (2008), Lamo, Pérez and Schuknecht (2012), Marzinotto and Turrini (2016) or Holm-Hadulla, et al (2010). 4 See, among others, Campos et al (2015).…”