The development of wages in the public sector and their connection with wages in the private sector
There is a long-term connection between the development of wages in the public sector and in the private sector. Between 1990 and 2012, wages in the public sector increased by 1.2 percent per year on average...
- There is a long-term connection between the development of wages in the public sector and in the private sector. Between 1990 and 2012, wages in the public sector increased by 1.2 percent per year on average, similar to the average annual rate of growth of product per employee in the economy.
- Since the 1990s, the average wage in the public sector has increased by less than the average wage in the private sector, adjusted for workers' characteristics. In the past decade, the wage increase for workers who remained employed was similar in both sectors.
- Since 1999, after the wage gap between the two sectors was closed, the short-term connections between them also became much stronger.
- Wage creep, which is responsible for two-thirds of the increase in real wages in the public sector, is stable over time and is not affected by business cycles.
- Most of the significant wage agreements in the public sector track the private sector wage trend, are procyclical, and other than outliers, expand when the fiscal deficit is low and contract when it is high.
This study of Yuval Mazar from the Resarch department of the Bank of Israel assessed the development of wages in the public sector and the connections that have existed in Israel between wages in the public sector and in the private sector since 1990. The study found that even though the two sectors determine wages based on different mechanisms, there is a long-term connection between wages in the two sectors, and this connection strengthened in particular since 1999. Starting in that year, the correlation coefficient between wages in the two sectors has been high and statistically robust, even when their long-term trend and the state of the business cycle are taken into account. This finding is consistent with other findings detailed in the Bank of Israel Annual Report for 2013, which indicate that the overall labor market in Israel became more efficient over the years. As part of this, the connection between average wages in the two sectors strengthened, as it is a single labor market.
Causality tests indicate a two-way connection since 1999, although the hypothesis that wages in the public sector are influenced by wages in the private sector is characterized by a higher level of robustness. In contrast, it seems that during the 1990s, wages in the public sector were the ones influencing the path of wages in the private sector, which was reflected in wages in the private sector increasing greatly due to wage agreements signed in the public sector in the mid-1990s, an increase which grew even stronger in 2000 and 2001.
The study found that wage agreements in the public sector are the mechanism responsible for the strengthened short-term connection between wages in the two sectors since the beginning of the previous decade. In contrast, wage creep in the public sector is characterized by low variance, and is not correlated with wages in the business sector. In total, the wage agreements were responsible for about one-third of the growth in the real wages of employees in the public sector (and for nearly 40 percent of the figure for workers who remain employed) during the reviewed period. The significant agreements were, for the most part, procyclical and were in line with the fiscal state of the economy.
Real wages per employee post in the private sector and in public services, 1980–2013 (2013 prices)
Breakdown of the real growth of employee wages in public administration over time, selected years (percent)*
* For purpose of comparison, the average real wage of all employees in the entire economy who remained in their positions from 2003 to 2011 increased by 35 percent.