Public employment and labour market performance: centralization wage setting effects

Céline Choulet ()
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Céline Choulet: EUREQua

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

Abstract: This paper studies the interactions between the centralization in wage bargaining and the consequences of public employment for labour market performance. We use a monopoly union model and focus on the fiscal externalities of the wage setting process. Our model suggests that public jobs crowd out private jobs through an increase in wage pressure, only when the wage setting takes place at the firm level. Public jobs Creation entails tax increases. In a decentralized wage setting, the tax increases diminish the marginal value of employment, because each job gives rise to a lower net income. Accordingly, when labour taxes rise, trade unions choose to increase wages at the expense of employment. When the wage setting is centralized, trade unions take into account the government budget constraint when they evaluate the marginal value of employment. In this context, public jobs Creation does not change the trade-off between wage and employment, and thus, does not entail any increase in wages. Empirical evidence from a sample of 11 OECD countries over the period 1960-1995 confirms that the crowding-out effect is statistically significant only in countries in which the wage setting is decentralized

Keywords: Public sector labour market; centralizations in wage bargaining (search for similar items in EconPapers)
JEL-codes: J45 J51 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-04
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Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:v04036

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