Private Wage Effects of a Large Public Sector Wage Increase. The Case of Hungary ÁLMOS TELEGDY Institute of Economics – HAS Central European University

Motivation: are there public-private wage spillovers? Very few studies analyzing the interaction of wages between the private and public sectors (Jacobsen, 1991) Very hard to identify such effects ▫ Public and private sectors are typically composed of diverse industries ▫ Co-movement of wages of similar workers ▫ Working hours, tasks, effort can be different ▫ Self-selection of workers across the sectors Without some external movement of wages, only correlations can be established

Motivation of corporations Spillovers may exist if ▫ Wages are high in the public sector ▫ Workers are mobile across sectors Private sector employers may increase wages to prevent workers from moving ▫ Even if workers do not move: threat effects

This study In September 2002 all public employees’ wages increased ▫ Large increase (50 percent) ▫ Sudden (from one day to another) This external shock can help identifying the spillover effect ▫ Get rid of the co-movement of wages ▫ Time span quite short, may assume that there are no large changes in emploment composition (unobservable)

Wage Policies in Hungary Private sector ▫ Decentralized wage bargaining ▫ Mostly weak unions Public sector ▫ Wage grid establishing minimum wages by types of workers ▫ Wages can deviate from the grid if the institution wants so and has funding

Hungarian Wage Survey Data ( ) Private sector ▫ All firms with >20 employees, a random sample of firms with more than 5 employees ▫ Workers sampled randomly based on birth date (5 th and 15 th for production workers, also 25 th for nonproduction) ▫ All workers in firms with <50 employees Public sector ▫ All employees whose employer uses a centralized book keeping software ▫ Same sampling as in private sector for the remainder Data weighted to be representative ▫ Worker weights within workplace + workplace weights

Sample Selection Three types of public sector workers: judges, public servants, public employees (~3/4 of public sector). Only the last type received the wage increase. Full-time workers in the private sector Age 16-60

Sample size Public Corporate YearUnweightedWeightedStat. Off. UnweightedWeightedStat. Off ,980571,136554,500123,4742,059,1931,880, ,777581,133573,300118,5292,081,7211,884, ,341580,572552,500131,8402,222,1531,918, ,311568,823546,500140,6492,217,6611,923,200

Demographic characteristics of public and private sector workers PublicCorporate Female Rate Age Experience Education Elementary Vocational High School University

Occupations distribution in the public and private sectors FEOR (ISCO)PublicPrivate Managers of business and budgetary institutions Professionals Technicians and associate professionals Office and management (customer services) clerks Services workers Skilled agricultural and forestry workers Craft and related trades workers Plant and machine operators and assemblers Elementary occupations

Earnings Monthly, from May ▫ Base salary ▫ Overtime ▫ Regular bonuses and premia, commissions, allowances… ▫ Extraordinary bonuses based on previous year’s records

Average earnings YearPublicCorporate

Public sector wage premium

Public sector wage premium from Mincer equation

Estimation Continuous treatment: take advantage of the diverse presence of the public sector in the economy Segment the labor market into cells (288) ▫ education (4 categories) ▫ potential experience (5 year intervals – 8 categories) ▫ occupation (1-digit ISCO – 9 categories) Assume that workers are substitutes within cells, but not across Variable of interest: the proportion of public sector workers in a cell

Share of public sector in the economy YearShareStd. Dev.MinMax

Estimation equation Use corporate sector employment Mincer equation, augmented by public share: lnw ij = α 0 + α 1 PUBLIC j + Σα 2k EDUC ki + α 3 Exp i + α 4 Exp i 2 + Σα 5l OCC li + α 6 FEMALE i +Σα 7m COUNTY mi + Σα 8t YEAR t + ε i

Public private wage spillovers

Estimation by subgroups Some groups are more likely to be affected by the wage increase ▫ High proportion of females in the public sector ▫ Young workers more mobile

Spillovers by gender

Spillovers by age

Other wage effects Large minimum wage increase: 100 percent in If this affected the two sectors differently, it may bias the results. ▫ Do the estimations separately for educational groups

Spillovers by education

Conclusions Identification of public wage spillovers from an external shock Wages increase for workers who are more exposed to the public sector