Optimal Public Sector Wages Articles uri icon

authors

  • BATISTA MAIA GOMES, PEDRO

publication date

  • September 2015

start page

  • 1425

end page

  • 1451

issue

  • 587

volume

  • 125

International Standard Serial Number (ISSN)

  • 0013-0133

abstract

  • I build a dynamic stochastic general equilibrium model with search and matching frictions to determine the optimal public sector wage policy. Public sector wages are crucial in achieving efficient allocation of jobs. High wages induce too many unemployed to queue for public sector jobs, in turn raising unemployment. The optimal wage depends on the frictions in the two sectors. Following technology shocks, public sector wages should be pro-cyclical and deviations from the optimal policy significantly increase the volatility of unemployment.