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Macroeconomic Implications of Cash Limits in the Public Sector

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  • Bertil Holmlund

Abstract

A cash limit is a fixed amount of money available for pay prior to the wage negotiations in the public sector. This paper examines the macroeconomic implications of cash limits in a unionized economy with decentralized wage bargaining in both private and public sectors. I focus in particular on the linkages between changes in the cash limit, wage‐setting, and employment in public and private sectors. Equilibrium unemployment is independent of the size of the public sector if there are no sectoral differences in the unions’ relative bargaining power. In general, unemployment may rise or fall by public‐sector expansion accomplished by means of an increase in the cash limit; unemployment increases if unions are relatively more powerful in the public than in the private sector.

Suggested Citation

  • Bertil Holmlund, 1997. "Macroeconomic Implications of Cash Limits in the Public Sector," Economica, London School of Economics and Political Science, vol. 64(253), pages 49-62, February.
    • Handle: RePEc:bla:econom:v:64:y:1997:i:253:p:49-62
    DOI: 10.1111/1468-0335.00063
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    References listed on IDEAS

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    1. Richard Layard & Stephen Nickell, 1990. "Is Unemployment Lower if Unions Bargain over Employment?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 773-787.
    2. repec:bla:econom:v:53:y:1986:i:211:p:281-302 is not listed on IDEAS
    3. Holmlund, Bertil, 1993. "Wage setting in private and public sectors in a model with endogenous government behavior," European Journal of Political Economy, Elsevier, vol. 9(2), pages 149-162, May.
    4. Dixon, Huw David & Rankin, Neil, 1994. "Imperfect Competition and Macroeconomics: A Survey," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 171-199, April.
    5. Dixon, Huw David, 1988. "Unions, Oligopoly and the Natural Range of Employment," Economic Journal, Royal Economic Society, vol. 98(393), pages 1127-1147, December.
    6. Leslie, Derek, 1985. "The Economics of Cash Limits as a Method of Pay Determination," Economic Journal, Royal Economic Society, vol. 95(379), pages 662-678, September.
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