Does Slack Influence Public and Private Labor Market Interactions?

Abstract

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