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Title: A Model of Market and Political Power Interactions for Southern Europe

Author(s): Tryphon Kollintzas, Dimitris Papageorgiou and Vanghelis Vassilatos

Publication Date: January 2015

Keyword(s): Growth, Insiders - Outsiders, Politicoeconomic Equilibrium, Public Sector Wage Premium and Southern European Economies

Programme Area(s): International Macroeconomics and Public Economics

Abstract: In recent years the growth pattern of most Southern European countries has been disturbed, as those countries are suffering from economic crises that go beyond the usual business cycle. In this paper, we develop a dynamic general equilibrium model of market and political power interactions that explains this growth reversal. Moreover, the model is consistent with several stylized facts of those countries, where wages in the public sector relative to the private sector are high and these wage differentials correlate negatively with public sector employment over total employment, total factor productivity, and output growth. The model is a synthesis of the insiders-outsiders labor market structure and the concept of an elite government. Outsiders form a group of workers that supply labor to a competitive private sector. And, insiders form a group of workers that enjoy market power in supplying labor to the public sector and influence the policy decisions of government, including those that affect the development and maintenance of public sector infrastructures.

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Bibliographic Reference

Kollintzas, T, Papageorgiou, D and Vassilatos, V. 2015. 'A Model of Market and Political Power Interactions for Southern Europe'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10359