Does Slack Influence Public and Private Labour Market Interactions?

30 Pages Posted: 21 Oct 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 J. Pérez

Banco de España - Research Department

Date Written: March 21, 2016


We empirically analyse the impact of public employment and public wages shocks on private labour market outcomes by examining whether 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 unemployment slack is key for determining: (i) whether public employment crowds out private employment, and (ii) the degree and extent of the influence of public wages on the private sector. In addition, we find that at times of economic distress, public wage adjustment has lower output costs than public employment cuts for the Spanish case, while the opposite occurs at the euro area level. We conjecture that differences in the degree of wage rigidities and the size of the unemployment pool may rationalise our findings.

Keywords: Public Employment, Wages, Unemployment, Fiscal Policies

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

Suggested Citation

Lamo, Ana and Moral-Benito, Enrique and Perez, Javier J., Does Slack Influence Public and Private Labour Market Interactions? (March 21, 2016). Banco de Espana Working Paper No. 1605. Available at SSRN: or

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 J. Perez

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid


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