July 2013

IZA DP No. 7524: The Effect of Public Wages on Corporate Compensation in Hungary

I identify wage spillovers from the public to the corporate sector with the help of a large and sudden public sector wage increase, which raised real compensation by 40 percent in two years, changing the average public wage premium from minus 10 to plus 12 percent. Using a dataset covering about 7 percent of Hungarian workers and their employer, the spillover effect is identified with the variation of the share of public sector employment within groups defined by gender, experience and occupation. The analysis shows that 10 percent higher share of public sector workers within worker-type induces an additional wage growth of 15-20 percent around the wage increase. Controlling for firm (worker spell) fixed effects does not change the results qualitatively and results in a spillover effect of 11-14 (7.5-12) percent. The spillover effect is positively correlated with the public wage premium within worker type, with occupations which are abundant in the public sector, with the availability of public sector jobs and being hired after the wage increase.