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Cover -- Table of Contents -- 1. Introduction -- 2. The Baseline Model -- 2.1 Firms -- 2.2 Labor Market -- 2.3 Households -- 2.4 Government -- 2.5 Market Clearing -- 2.6 Model Solution -- 3. Calibration and Estimation -- 3.1 Calibration -- 3.2 Prior Distribution -- 3.3 Bayesian Estimation -- 4. The Macroeconomic Effects of Public Wage Reduction -- 4.1 Impulse Responses: Public Wage vs. Goods Purchase Shocks -- 4.2 Government Spending Multipliers -- 4.3 Public and Private Wage Interactions -- 4.4 Historical Decomposition -- 5. Sensitivity Analysis -- 5.1 Utility Enhancing Public Services -- 5.2 Productive Public Services -- 6. Conclusion -- Appendix A. The Derivation of Log-Linearized Model -- Appendix B. Data Description -- Tables -- Table 1. Calibrated Parameters and Some Steady-State Values -- Table 2. Prior and Posterior Estimates: Baseline Model -- Table 3. Present-value, Cumulative Fiscal Multipliers: Mean and 90-Percent Intervals (in Parentheses) for the Baseline Model -- Table 4. Posterior Estimation: Sensitivity Analysis -- Table 5. Model Fit Comparison -- Figures -- Figure 1. U.S. Government Debt vs. Compensation -- Figure 2. Prior vs. Posterior Distribution: Baseline -- Figure 3. Effects of a Public Wage Reduction: the Baseline Model -- Figure 4. Effects of a Government Goods Purchase Reduction: the Baseline Model -- Figure 5. Public and Private Wage Interactions: Different Degrees of Nominal Wage and Price Rigidities and the Elasticity of Substitutability between Public-and Private-Sector Output, Labor, and Wage -- Figure 6. Historical Decomposition of Primary Fiscal Balance -- Figure 7. Historical Decomposition of Output -- Figure 8. Sensitivity Analysis of Impulse Response of -1% public Wage Shock -- References.

This paper investigates the relationship between public and private wages in the five largest euro area countries for the period 1997-2017. The analysis shows that there exists a positive and significant response of private wages to a public wage shock. This effect is found to be temporary and to differ across countries (positive and significant in France, Spain, Italy and non-significant in Germany and the Netherlands). Interestingly, the response of private wages is found to be asymmetric: a positive and statistically significant response is found in case of a positive shock to public wages, while no statistically significant effects are detected in case of a cut to public wages. As the public wage containment policies adopted during the sovereign debt crisis are expected to be gradually lifted in several euro area countries, the findings of this paper suggest that knock-on effects on private sector wages cannot be excluded in the years to come.

Past research demonstrates that the estimated size of the federal government earnings differential shrinks substantially with the addition of detailed occupational controls. Possible explanations for this reduction are: controlling for the differing sectoral distributions of common occupations, & controlling for detailed occupations unique to each sector. While occupational detail does not eliminate the federal differential, more than two-thirds of the reduction in the federal differential comes from controlling for unique occupations &, moreover, this is equivalent to excluding all observations in unique occupations. This finding is contrasted with that for the local sector in which the differing distribution of common occupations largely explains the pattern of the differential. 6 Tables, 1 Appendix, 27 References. [Copyright 2004 John Wiley and Sons, Ltd.]

This paper examines the role of government wages in ensuring macroeconomic stability and competitiveness in the euro area. Recent empirical evidence suggests that government wage expenditure is subject to a pro-cyclical bias in most euro area countries and at the euro area aggregate level. Moreover, the evidence points to a strong positive correlation and co-movement between public and private wages in the short to medium term, both directly and indirectly via the price level, in most euro area countries. In a number of countries this interrelation between public and private wages coincided with strong public wage growth and competitiveness losses. These findings underpin the need for prudent public wage policies supported by strong domestic fiscal frameworks and appropriate wage-setting institutions in order to enhance economic stability and competitiveness in Economic and Monetary Union.

Unlike the private sector, the French public sector is still characterized by a high level of centralization in pay setting. Public services have recently gained more autonomy in personnel management locally. Consequently, the public–private wage gap at the local level may play an increasing role in recruitment policy. Using standard methods of estimation and geographically weighted regressions for 2002, we show that the average public–private wage differential does not differ widely across regions. However, quantile regressions estimated by region reveal that the pattern of public wage premiums varies according to gender and skill.

Based on data from a cross section of U.S. metro areas, we show that public employment correlates negatively with business cycle volatility, hinting at a stabilizing effect of public employment, while public wages correlate weakly and positively with business cycle volatility, hinting at a destabilizing effect of public wages. To explain these relationships, we set up a search and matching model that contains a government sector and a role for government spending in product markets. This latter mechanism affects how the outside option behaves, and this mechanism can help a search and matching model to generate wage-reducing and stabilizing effects of public employment. Without this mechanism, a search and matching model cannot generate these effects.