Abstract
This paper studies the interactions between wages in the public sector and the private traded and non-traded sector in ten transition countries which are members of the European Union, during the period 2000–2011. The theoretical literature on wage spillovers, as well as the Balassa–Samuelson hypothesis, suggests that the internationally traded sector should be the leader in wage setting, with sheltered and public sector wages adjusting. Using a cointegrated VAR approach we show that a large heterogeneity across countries is present, and non-traded and public sector wages are often leaders in wage determination or at least affect traded sector wages in the short run. This result is relevant from a policy perspective since wage spillovers, leading to costs growing faster than productivity, may affect the international cost competitiveness of the traded sector and thus the catching-up process may be accompanied by accumulation of large international imbalances.
Similar content being viewed by others
Notes
Empirical models testing for the B–S effect often estimate a regression having CPI inflation differential as dependent variable and the dual productivity growth differential as explanatory variable. This comes from assuming that traded sector wages grow in step with productivity.
The only exception is Friberg (2007), who applies his empirical model to Sweden.
In particular, he distinguishes between private sector, manufacturing sector, construction, wholesale and retail trade, financial sector, central government, and county/municipal government.
We thank an anonymous referee for making this point.
With three variables, if r is the number of cointegrating vectors, there will be \(3-r\) common stochastic trends which, testing for weak exogeneity, may be identified with \(3-r\) variables of the system.
See the discussion in Lamo et al. (2012), p. 242.
The exact definition of the series and the sources is provided in Appendix 1.
We thank an anonymous referee for stressing this point.
The literature often identifies the open sector with industry and the sheltered sector with all the rest (for example, Égert 2002, 2003; Golinelli and Orsi 2002). Halpern and Wyplosz (2001) identify them, respectively, with Industry and Services. Agriculture is excluded in Coricelli and Jazbec (2004).
Results of the empirical analysis which include Education and Health are available from the author upon request.
Indeed, the IR analysis in Sect. 5 will show that, depending on the country, it takes from 4 to 8 quarters for wages in following sectors to reach their new equilibrium level after a shock in the leading sector.
The Phillips–Perron unit root test confirmed the results of the ADF–GLS test. Results are available from the author upon request.
Moreover, the stationarity test within the VECM allows us to control for breaks in the series which indeed are present in the case of Bulgaria and Estonia.
The presence of a unit root was rejected in all cases when the test was performed on the first difference of the wage series. Thus, all series are I(1).
See Juselius 2006, Chap. 6.
The deterministic specification and the order of the underlying VARs are reported in Appendix 2.
Specification tests [multivariate and univariate normality, autocorrelation AC(4), ARCH(4)] are available at http://sites.google.com/site/gdadamosite/internal-resume/research.
To construct WLI, we order sectors from the most open to the least open. Thus, WLI takes value 1 when T is leader, 2 when N is leader, and 3 when P is leader. When P and N are jointly weakly exogenous it takes value of 2.5. When T is weakly exogenous jointly with either P or N, WLI = 1.5. The qualitative results we obtained were robust to alternative constructions of WLI.
This result was confirmed by using a measure of co-ordination in wage bargaining instead of centralization (i.e., the variable WCOORD in the ICTWSS Database). Following Lamo et al. (2008), we also estimated the correlation between an index of Government intervention in wage bargaining and WLI, but found practically no correlation (\(\rho \) = 0.05).
References
Ardagna S (2007) Fiscal Policy in unionized labor markets. J Econ Dyn Control 31:1498–1534
Aukrust O (1970) PRIM I: A model of the price income distribution mechanism of an open economy. Rev Income Wealth 16(1):51–78
Aukrust O (1977) Inflation in the open economy: a Norwegian Model. Artikler no.96, Statistisk Sentralbyra, Oslo
Balassa B (1964) The purchasing-power parity doctrine: a reappraisal. J Polit Econ 72(6):584–596
Bemmels BG, Zaidi MA (1990) Wage leadership in Canadian industry. Appl Econ 22(4):553–567
Calmfors L, Driffill J (1988) Bargaining structure, corporatism, and macroeconomic performance. Econ Pol 3(6):13–61
Coricelli F, Jazbec B (2004) Real exchange rate dynamics in transition economies. Struct Change Econ Dyn 15:83–100
Demekas DG, Kontolemis ZG (2000) Government employment and wages and labour market performance. Oxf B Econ Stat 62(3):391–415
Drine I, Égert B, Lommatzsch K, Rault C (2003) The Balassa–Samuelson effect in Central and Eastern Europe: myth or reality? J Comp Econ 31(3):552–572
Égert B (2003) Nominal and real convergence in Estonia: the Balassa–Samuelson (dis)connection. William Davidson Institute Working Paper Series 556
Égert B (2007) Real convergence, Price level convergence and Inflation in Europe. Bruegel working paper no. 2007/2
Elliott G, Rothenberg TJ, Stock JH (1996) Efficient tests for an autoregressive unit root. Econometrica 64(4):813–836
Friberg K (2007) Intersectoral wage linkages: the case of Sweden. Empir Econ 32:161–184
Froot K, Rogoff K (1995) Perspectives on PPP and Long-run real exchange rates. In: Grossman G, Rogoff K (eds) Handbook of international economics, 3rd edn. Elsevier, Amsterdam
Golinelli R, Orsi R (2002) Modelling inflation in EU accession countries: The case of the Czech Republic, Hungary and Poland. Eastward Enlargement of the Euro-zone Working Papers, Free University Berlin, Jean Monnet Centre of Excellence
Granger CWJ (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37:424–438
Halpern L, Wyplosz C (2001) Economic transformation and real exchange rates in the 2000s: the Balassa–Samuelson connection. UNECE discussion paper no. 2001.1
Jacobson T, Ohlsson H (1994) Long-run relations between private and public sector wages in Sweden. Empir Econ 19:343–360
Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Dyn Control 12:231–254
Johansen S (2002) A small sample correction for the test of cointegrating rank in the vector autoregressive model. Econometrica 70(5):1929–1961
Juselius K (2006) The cointegrated VAR model: methodology and application. Oxford University Press, Oxford
Klau M, Mihaljek D (2004) The Balassa–Samuelson effect in central Europe: a disaggregated analysis. Comp Econ Stud 46:63–94
Klyviene V, Rasmussen LT (2010) Causes of financial crisis: the case of Latvia. Ekonomika 89(2):7–27
Lamo A, Perez JJ, Schuknecht L (2008) Public and private sector wages: comovement and casuality. ECB working paper no. 963
Lamo A, Perez JJ, Schuknecht L (2012) Public or private sector wage leadership? An international perspective. Scand J Econ 114(1):228–244
Lamo A, Perez JJ, Schuknecht L (2013) Are government wages interlinked with private sector wages? J Policy Model. doi:10.1016/j.jpolmod.2012.12.003
Lindquist M, Vilhelmsson R (2006) Is the Swedish central government a wage leader? Appl Econ 38(14):1617–1625
Mizala A, Romaguera P (1995) Testing for wage leadership processes in the Chilean economy. Appl Econ 27(3):303–310
Perez JJ, Sanchez J (2011) Is there a signalling role for public wages? Evidence from the euro area based on macro data. Empir Econ 41:421–445
Quadrini V, Trigari A (2007) Public employment and the business cycle. Scand J Econ 109(4):723–742
Samuelson PA (1964) Theoretical notes on trade problems. Rev Econ Stat 46(2):145–154
Tagtstrom S (2000) The wage spread between different sectors in Sweden. Sveriges Riksbank, Economic Review 4/2000
Acknowledgments
The author gratefully acknowledges financial support from the Spanish MINECO Project ECO2011-30260-C03-01. I am indebted to Riccardo Rovelli, Luca Fanelli, Katarina Juselius, Stephen Cecchetti, Efrem Castelnuovo, and participants at the VIII INTECO Workshop at the University of Valencia, as well as two anonymous referees, for detailed and enlightening comments.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
D’Adamo, G. Wage spillovers across sectors in Eastern Europe. Empir Econ 47, 523–552 (2014). https://doi.org/10.1007/s00181-013-0744-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-013-0744-z