The Economic Crisis, Public Sector Pay, and the Income Distribution

19 Pages Posted: 29 Jun 2010  

Tim Callan

Economic and Social Research Institute, Ireland; IZA Institute of Labor Economics

Brian Nolan

Economic and Social Research Institute, Ireland

John R. Walsh

Economic and Social Research Institute, Ireland

Abstract

An important aspect of the impact of the economic crisis is how pay in the public sector responds in the face not only of the evolution of pay in the private sector, but also extreme pressure on public spending (of which pay is a very large proportion) as fiscal deficits soar. What are the effects on the income distribution of cutting public sector pay rates or alternative strategies to reduce the public sector pay bill, and how does these vary depending on the evolution of pay in the private sector? This paper investigates these issues using data and a tax-benefit simulation for Ireland, a country which faces a particularly severe fiscal crisis and where innovative measures have already been implemented to claw back pay from public sector workers in the guise of a "pensions levy," followed most recently by a significant cut in nominal pay rates. The SWITCH tax-benefit model first allows the distributional effects of these measures, which achieved a substantial reduction in the net public sector pay bill, to be teased out. The overall impact on the income distribution, set against alternative scenarios for pay in the private sector, is assessed. This provides empirical evidence relevant to policy choices in relation to a key aspect of household income over which governments have direct influence, while at the same time illustrating methodologically how a tax-benefit model can serve as the base for such investigation.

Keywords: public sector pay, income distribution, fiscal crisis

JEL Classification: D63, J38, J45

Suggested Citation

Callan, Tim and Nolan, Brian and Walsh, John R., The Economic Crisis, Public Sector Pay, and the Income Distribution. IZA Discussion Paper No. 4948. Available at SSRN: https://ssrn.com/abstract=1631083

Tim Callan (Contact Author)

Economic and Social Research Institute, Ireland ( email )

4 Burlington Road
Dublin 4
Republic of Ireland

IZA Institute of Labor Economics ( email )

Bonn, D-53072
Germany

Brian Nolan

Economic and Social Research Institute, Ireland ( email )

4 Burlington Road
Dublin 4

John R. Walsh

Economic and Social Research Institute, Ireland ( email )

Dublin 4
Ireland

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