The Fiscal and Macroeconomic Effects of Government Wages and Employment Reform

47 Pages Posted: 27 Sep 2016

See all articles by Javier J. Pérez

Javier J. Pérez

Banco de España - Research Department

Marie Aouriri

Banque de France

Maria Campos

Bank of Portugal

Dmitrij Celov

Bank of Lithuania

Domenico Depalo

Bank of Italy

Evangelia Papapetrou

Bank of Greece

Jurga Pesliakaite

Bank of Lithuania

Roberto Ramos Magdaleno

Banco de España

Marta Rodríguez Vives

European Central Bank (ECB)

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Date Written: August 24, 2016

Abstract

This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms.

Keywords: public employment, public wages, labour market, fiscal policies, fiscal consolidation

JEL Classification: H50, E62, J45

Suggested Citation

Perez, Javier J. and Aouriri, Marie and Campos, Maria and Celov, Dmitrij and Depalo, Domenico and Papapetrou, Evangelia and Pesliakaite, Jurga and Ramos Magdaleno, Roberto and Rodríguez Vives, Marta, The Fiscal and Macroeconomic Effects of Government Wages and Employment Reform (August 24, 2016). ECB Occasional Paper No. 176, Available at SSRN: https://ssrn.com/abstract=2828667

Javier J. Perez (Contact Author)

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

HOME PAGE: http://www.bde.es/investigador/staff/95.htm

Marie Aouriri

Banque de France ( email )

Paris
France

Maria Campos

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Dmitrij Celov

Bank of Lithuania ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

Domenico Depalo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Evangelia Papapetrou

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Jurga Pesliakaite

Bank of Lithuania ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

Roberto Ramos Magdaleno

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Marta Rodríguez Vives

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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