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. Hungarian Wage Survey Data (2002-2005) 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

7. 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

8. Sample size Public Corporate YearUnweightedWeightedStat. Off. UnweightedWeightedStat. Off. 2002377,980571,136554,500123,4742,059,1931,880,000 2003404,777581,133573,300118,5292,081,7211,884,900 2004395,341580,572552,500131,8402,222,1531,918,900 2005386,311568,823546,500140,6492,217,6611,923,200

9. Demographic characteristics of public and private sector workers PublicCorporate Female Rate73.8039.57 Age42.5539.50 Experience23.9722.03 Education Elementary17.7616.93 Vocational13.5735.68 High School29.0934.62 University39.5812.77

10. Occupations distribution in the public and private sectors FEOR (ISCO)PublicPrivate Managers of business and budgetary institutions7.310.59 Professionals31.444.57 Technicians and associate professionals25.1614.97 Office and management (customer services) clerks5.686.49 Services workers7.7710.63 Skilled agricultural and forestry workers0.442.08 Craft and related trades workers3.8527.03 Plant and machine operators and assemblers3.0616.15 Elementary occupations15.37.48

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 YearPublicCorporate 2002137 926169 457 2003182 438175 313 2004184 231176 639 2005175 515180 757

13. Public sector wage premium

14. Public sector wage premium from Mincer equation

15. 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

16. Share of public sector in the economy YearShareStd. Dev.MinMax 20020.2130.2030.0030.982 20030.2130.2010.0030.858 20040.2020.1950.0030.783 20050.2000.1960.0010.735

17. 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

18. Public private wage spillovers

19. 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

20. Spillovers by gender

21. Spillovers by age

22. Other wage effects 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

23. Spillovers by education

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