Private Wage Effects of a Large Public Sector Wage Increase . The Case of Hungary

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

2. 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

3. 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

4. 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)

5. 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

6. Private sector • All firms with >20 employees , a random sample of firms with more than 5 employees • Workers sampled randomly based on birth date (5th and 15th for production workers, also 25th 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 tobe representative • Worker weightswithinworkplace + workplace weights Hungarian Wage Survey Data (2002-2005)

7. 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 Selection

8. Sample size

9. Demographic characteristics of public and private sector workers

10. Occupations distribution in the public and private sectors

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

12. Average earnings

13. Public sector wage premium

14. Public sector wage premium from Mincer equation

15. 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 Estimation

16. Share of public sector in the economy

17. Use corporate sector employment Mincer equation, augmented by public share: lnwij = α0 + α1PUBLICj + Σα2kEDUCki + α3Expi + α4Expi 2 +Σα5lOCCli + α6FEMALEi +Σα7mCOUNTYmi + Σα8tYEARt + εi Estimation equation

18. Public private wage spillovers

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

20. Spillovers by gender

21. Spillovers by age

22. Large minimum wage increase: 100 percent in 1999-2001. If this affected the two sectors differently, it may bias the results. • Do the estimations separately for educational groups Other wage effects

23. Spillovers by education

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