The public-private wage GAP in the euro area a decade after the sovereign debt crisis

The most recent fiscal adjustment episode in the euro area occurred during the so-called euro area sovereign debt crisis. It affected many countries and was quite significantly impacted by the public wage bill. The austerity measures contributed, in particular, to an immediate partial correction of positive public–private pay differentials, most notably in countries subject to the EU’s financial assistance programmes. An important aspect of the debate on public wage bill restraint concerns how long such policies can be sustained over time. In this paper, we investigate whether the downward corrections that were initially observed in many countries were permanent or ended up being transitory (i.e. whether they were reversed in subsequent years). To do so, we focus on euro area countries over the 2007-2021 period, so as to have sufficient observations in both the pre- and post- adjustment periods. We estimate the wage differential, controlling for observable differences between individuals using cross-sectional microdata from a harmonized survey (the European Union Statistics on Income and Living Conditions (EU-SILC)). We show that the lower wage premiums only partially reverted to pre-fiscal consolidation levels over the subsequent decade and that more sustained policy achievements are linked to larger fiscal adjustment efforts during the 2010–2014 crisis.