Follow the leader? The long-run interaction between public and private sector wage growth in the UK

Abstract

With one-fifth of the UK labour force employed in the public sector, public sector pay and its interaction with private sector pay is an important driver of the macroeconomy. Using new data on sector-level earnings and sector–industry-level pay settlements, this paper addresses the fundamental question of which sector leads and which follows in terms of earnings determination. We find that in the long run, public sector wages adjust to wages set in the private sector, maintaining a consistent relationship. We further find that there can be significant wage spillovers from the public sector to the private sector in the short run. These tend to be more pronounced for private sector industries that are domestically facing, characterized by low worker bargaining power, or reliant on public sector inputs. This paper's findings have important implications for macroeconomic policy that aims to balance inflationary forces and fiscal funding pressures.