Who’s the Boss? Exploring Public and Private Wage Growth Leadership in State-Level Education and Health Industries in Australia

Research by: Martin O’Brien, Paul Gollan, & Florian Gerth

Executive Summary

The purpose of this study is to empirically analyze the wage leadership relationship between public and private sector wage patterns for the education and health sectors in Australia for the last 15 years. In order to find robust and statistically significant parameters, this study uses and estimates the workhorse in empirical macroeconometrics, a Vector Autoregressive (VAR) Model in conjunction with a Vector Error Correction (VECM) Model a la Sims.

Wage outcomes in the health and education industries are important to labor economists for a number of reasons. First, over 20% of most OECD countries’ labor force are employed in these industries and, second, they contain a significant proportion of both private and public sector workers. In education, 50% of workers in the UK and Australia, and over 70% of workers in the US, are employed by the public sector. A priori, we would not expect a close association between public and private sector wages. Typically, public sector wage policies are set by the government of the day, while private sector wages are determined by market forces. However, the last decade has seen a shift towards the interrelationship between public and private sector wages, and the identification of wage leadership. Therefore, the purpose of this study is to address these dynamics by exploring the interaction between public and private sector wage growth at a more disaggregated level, using Australia as a target country. More specifically, we model full wage adaptability, long-run leadership, and short-run leadership for education and health industries in the states of NSW and Victoria.

The main contributions of the paper are as follows:

1. The disaggregation of the Australian education and health sectors using microeconomic data as opposed to aggregate macroeconomic data.
2. The use of Vector Error Correction Models to estimate short- and long-run relationships, as well as short-run dynamics in the study of wage leadership relationships.
3. The disaggregation of wage dynamics not only for industry but also for different states within Australia.

Ultimately, this paper tries to shed light on the wage-setting dynamics for different states within Australia using disaggregated microeconomic data. This is an important question because it will help policymakers understand whether wage trends are driven more by market forces or government policy. By including particular jurisdictions, we were able to incorporate alternative public sector wage-setting policies, highlighting the potential effects of wage caps. The main finding is that the public sector was the wage leader in all models. Presumably, the relative size of the public sector contributes to this finding. Whereas the public sector employs approximately 15% of the Australian workforce in general, it employs 50% of the education and 25% of health. Furthermore, the estimated adjustment coefficients were relatively high and likely to be related to the high mobility of workers between public and private sectors within these industries.

Keywords: wage leadership, wage growth, public sector, vector error correction model (VECM), granger causality

To cite this article: O’Brien, M., Gollan, P., & Gerth, F. (2024). Who’s the boss? Exploring public and private wage growth leadership in state-level education and health industries in Australia. Applied Economics Letters. https://doi.org/10.1080/13504851.2024.2334439

To access this article: https://doi.org/10.1080/13504851.2024.2334439

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Applied Economics Letters is a companion journal to Applied Economics. It publishes short accounts of new original research and encourages discussion of papers previously published in its companion journal. Letters are reviewed by the Editor, a member of the Editorial Board, or another suitable authority. They are generally applied in nature but may include discussion of method and theoretical formulation.

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