Does Slack Influence Public and Private Labor Market Interactions?

27 Pages Posted: 26 Apr 2016

See all articles by Ana Lamo

Ana Lamo

European Central Bank (ECB)

Enrique Moral-Benito

Banco de España; Universidad Carlos III de Madrid

Javier Pérez


Date Written: April 25, 2016


We empirically analyze the impact of public employment and wages' shocks on private labor market outcomes by studying if policies operate differently in periods of economic slack than in normal times. We use local projection methods and focus on the Spanish and euro area aggregate cases. We find that the degree of economic slack is key to determine: (i) if public employment crowds-out private employment, and (ii) the degree and extent of public wage influence on the private sector.

In addition, we find that the specific features of the economy also count. In the case of Spain, when fiscal consolidation is implemented at times of economic distress, the contractionary effects of public employment cuts appear more damaging for the economy than those of public wage cuts, while the opposite happens for the euro area as a whole. These differences are likely to be related to specific features of the labor markets in both cases.

Keywords: Public employment, Wages, Unemployment, Fiscal policies

JEL Classification: E62, E65, H6, C3, C82

Suggested Citation

Lamo, Ana and Moral-Benito, Enrique and Pérez, Javier, Does Slack Influence Public and Private Labor Market Interactions? (April 25, 2016). ECB Working Paper No. 1890. Available at SSRN:

Ana Lamo (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Enrique Moral-Benito

Banco de España ( email )

Alcala 50
Madrid 28014

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903

Javier Pérez

Independent ( email )

No Address Available
United States

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