This study finds that there is a long-term connection between the development of wages in the public sector and in the private sector. Since 1999, after the wage gap between the two sectors was closed, the short-term connections also became much stronger. During these years, wages in both sectors moved in tandem, with wages in one of them affecting wages in the other. During the 1990s, public sector wages led developments in private sector wages, and in the economy as a whole. While wage creep in the public sector has had low variance over the years, and is not affected by business cycles, most of the significant wage agreements in the public sector track private sector wage trends, are procyclical, and other than two agreements in the mid-1990s, they expand when the fiscal deficit is low and contract when it is high. The wage agreements themselves are responsible for about one-third of total real growth in employee wages in the public sector, and there is an almost perfect correlation between them and the overall change in employee wages in the public sector. Essentially, the wage agreements signed in the public sector since 1999 are responsible for the strong correlation between wages in the public sector and wages in the private sector. Since the 1990s, the average wage in the public sector, adjusted to workers' characteristics, has increased by less than the average wage in the private sector, while the wage increase for workers who remained employed was similar in both sectors.


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