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The fiscal and macroeconomic effects of government wages and employment reform
2016
Authors
Marta Rodríguez-Vives
Roberto Ramos
Jurga Pesliakaitė
Evangelia Papapetrou
Domenico Depalo
Dmitrij Celov
Marie Aouriri
Javier J. Pérez
Publication Year
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 countryspecific conditions. These gains can be reinforced by relevant fiscal-structural reforms.