Public and private sector wages interactions in a general equilibrium model |
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Authors: | Gonzalo Fernández-de-Córdoba Javier J Pérez José L Torres |
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Institution: | 1. Universidad de Málaga, Málaga, Spain 2. Bank of Spain, Madrid, Spain
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Abstract: | It is common wisdom that public sector wages are not determined in the same way as private sector wages. At the same time, the empirical evidence available for OECD countries finds a strong positive correlation between public and private sector wages. In this paper, we develop a model that is consistent with a political economy view of the determination of public sector wages and employment, while being consistent with the said empirical evidence. Public finance constraints are crucial: In booms, governments expand employment and wages, while in downturns, lack of tax revenues forces the government to cut back the wage bill. |
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