21. Price Stability Impact on Wage Growth in the Public and Private Sectors

This chapter investigates the extent to which the inflation regimes impact the interaction between public- and private-sector wage growth. Evidence based on the VAR approach indicates that there are significant spill-overs from private-sector wage growth to the public sector but not vice versa. The spill-over of increases in private-sector wage growth is particularly pronounced in the high-inflation regime. In contrast, the low-inflation regime dampens the public-sector wage growth responses to positive private-sector wage growth shock. In policy terms, this shows that price stability matters for the transmission of positive private-sector wage shocks to public-sector wage growth. In addition, the high sensitivity of public-sector wage growth to private-sector wage increases indicates the possibility that high public-sector wage growth may undermine the fiscal position by raising the public-sector wage bill to unsustainable levels in the long run. Nonetheless, the low-inflation regime weakens the degree of the spill-overs in wage negotiations between the public and private sector. In turn, this will impact unit labour costs, administered prices and the relative cost competitiveness of the South African economy.