Can Public Sector Wage Bills Be Reduced?

46 Pages Posted: 26 Feb 2012 Last revised: 6 Mar 2012

See all articles by Pierre Cahuc

Pierre Cahuc

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA); University of Angers - French National Center for Scientific Research (CNRS); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Stéphane Carcillo

Organisation for Economic Co-operation and Development (OECD); Sciences Po; IZA

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Date Written: March 2012

Abstract

This paper analyzes the relation between public wage bills and public deficits in the OECD countries from 1995 to 2009. The paper shows that fiscal drift episodes, characterized by simultaneous increases in the GDP shares of public wage bills and budget deficits, are more frequent during booms and election years, but not during recessions, except for the 2009 exceptionally strong recession. The emergence of fiscal drift episodes during booms and election years is less frequent in countries with more transparent government, more freedom of the press, as well as in countries with presidential regimes and less union coverage. Inversely, fiscal tightening episodes, characterized by simultaneous decreases in the GDP shares of public wage bills and budget deficits, occur less often during booms than during recessions. The emergence of fiscal tightening episodes during recessions and election years is less frequent in countries with more union coverage.

Suggested Citation

Cahuc, Pierre and Carcillo, Stephane, Can Public Sector Wage Bills Be Reduced? (March 2012). NBER Working Paper No. w17881, Available at SSRN: https://ssrn.com/abstract=2011316

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