LAUSR

Abstract We examine the spillovers from changes in public sector wages and employment on private sector wages. Using a panel VAR model, we show that changes in public sector wages have a greater effect on private sector wages than changes in public sector employment. We motivate our analysis using the Economic Adjustment Program for Greece, and a simple theoretical model. The empirical validity of these effects is verified through a series of robustness tests. These results have important implications on the evaluation of the recent EU Economic Adjustment Programs and the future design of Internal Devaluation strategies.