Interactions between Private and Public Sector Wages

We examine the interactions between public and private sector wages per employee inOECD countries. The growth of public sector wages and of public sector employmentpositively affects the growth of private sector wages. Moreover, total factor productivity, theunemployment rate and the degree of urbanisation are also important determinants of privatesector wage growth. With respect to public sector wage growth, we find that it is influencedby fiscal conditions in addition to private sector wages. We then set up a dynamic labourmarket equilibrium model with two sectors, search and matching frictions and exogenousgrowth to understand the interaction mechanisms. The model is quantitative consistent withthe main estimation findings.::