Working Paper: CEPR ID: DP10359
Authors: Tryphon Kollintzas; Dimitris Papageorgiou; Vanghelis Vassilatos
Abstract: In recent years the growth pattern of most Southern European countries has been disturbed, as those countries are suffering from economic crises that go beyond the usual business cycle. In this paper, we develop a dynamic general equilibrium model of market and political power interactions that explains this growth reversal. Moreover, the model is consistent with several stylized facts of those countries, where wages in the public sector relative to the private sector are high and these wage differentials correlate negatively with public sector employment over total employment, total factor productivity, and output growth. The model is a synthesis of the insiders-outsiders labor market structure and the concept of an elite government. Outsiders form a group of workers that supply labor to a competitive private sector. And, insiders form a group of workers that enjoy market power in supplying labor to the public sector and influence the policy decisions of government, including those that affect the development and maintenance of public sector infrastructures.
Keywords: growth; insiders; outsiders; politicoeconomic equilibrium; public sector wage premium; southern European economies
JEL Codes: J45; O43; O52; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High public sector wage premiums (J45) | misallocation of labor (J29) |
| misallocation of labor (J29) | lower total employment (J63) |
| misallocation of labor (J29) | lower total factor productivity (O49) |
| misallocation of labor (J29) | lower output and growth (O49) |
| High public sector wage premiums (J45) | lower total factor productivity (O49) |
| High public sector wage premiums (J45) | lower output and growth (O49) |