This chapter investigates whether the wage premium shock matters for the public-sector wage dynamics. Evidence shows that the wage premium impacts the public- and private-sector wage growth. The inflation regimes matter in the amplification of the effects. We establish that there is cyclicality in public and private-sector wage growth. A positive shock to changes in unemployment leads to a decline in private- and public-sector wage, indicating the existence of pro-cyclicality. The peaks in the cyclicality effects are more pronounced in the high-inflation regime. Overall, the evidence supports the existence of the pro-cyclicality effects in private and public wage growth due to unemployment shocks.
Furthermore, public-sector wage growth leads to an increase in tax revenue while the budget balance declines. Alternatively, the budget deficit widens significantly. The results imply that an increase in tax revenue is important to finance the wage bill. Moreover, positive wage growth spills over to the public budget balance and tax revenue. We establish that the private-sector wage transmits shocks to the budget balance and that the presence of private-sector wage growth worsens the budget deficit following a positive public-sector wage sector shock. The size of the amplification is affected by the inflation regimes.
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