The relationship between government and export sector wages and implications for competitiveness

In 2012, the general government sector employed on average about 15% of the labour force in the euro area. Since most countries in the euro area are now trying to consolidate public finances, whilst also trying to boost competitiveness for external rebalancing and to reduce unemployment, it is crucial to assess whether there is any wage spillover from the public to the export sector, in particular under conditions of fiscal stress. This section shows that there has been a link between government and manufacturing wages over the long-run, which is much closer when the government employs a large share of the labour force. Government size dimension is especially important during fiscal consolidation. If the government wage bill is inflated due to unjustified wage premia for example, limiting government wage growth is a fiscal strategy that may, among other effects, deliver competitiveness gains that contribute to external rebalancing and help boost employment in the tradable sector.