Public and private sector wages interactions in a general equilibrium model

Gonzalo Fernandez-de-Cordoba, Javier Pérez and Jose Torres ()

No 924, Working Papers from Banco de España

Abstract: This paper develops a dynamic general equilibrium model in which the public and the private sector interact in the labor market. Previous studies that analyze the labor market effects of public sector employment and wages have mostly assumed exogenous rules for public wage and public employment. We show that theories that equalize wages with marginal products in the private sector can rationalize the interaction of public and private sector wages when extended to accommodate a non-trivial government sector/public sector union that endogenously determines public employment and wages. Our model suggests a positive correlation between public and private sector wages. Any increase in tax revenues, coupled with the existence of a positive public-private sector wage gap, makes working in the public sector an attractive option. Thus, a positive neutral productivity shock increases public and private sector wages. More interestingly, even a private-sector specific productivity shock spills-over to the public sector, increasing public wages. These facts lend some support to the wage leading role of the private sector. Nevertheless, at the same time, a positive shock to public sector wages would lead to an increase in private sector wages, via the flow of workers from the private to the public sector.

Keywords: Public wages; public employment; labor market; trade unions (search for similar items in EconPapers)
JEL-codes: C32 E62 E63 H50 J30 J51 J52 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2009-10
New Economics Papers: this item is included in nep-dge and nep-lab
References: Add references at CitEc
Citations: View citations in EconPapers (14)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/09/Fic/dt0924e.pdf First version, October 2009 (application/pdf)

Related works:
Journal Article: Public and private sector wages interactions in a general equilibrium model (2012)
Working Paper: Public and private sector wages interactions in a general equilibrium model (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0924

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