Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153533
Authors: 
Fernàndez-de-Córdoba, Gonzalo
Pérez, Javier J.
Torres, José L.
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1099
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.
Subjects: 
Labor market
public employment
public wages
Trade Unions
JEL: 
C32
J30
J51
J52
E62
E63
H50
Document Type: 
Working Paper

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