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Abstract

Cross-country variation in the outcomes of public sector wage-setting (PSWS) persists in Europe. Received wisdom from the neo-corporatist scholarship attributes it to the presence/absence of centralized or co-ordinated wage-setting regimes. This article challenges the conventional view by analysing PSWS through the lens of the common-pool problem of public finance and special-interest politics. Given the structure of political incentives and the use of fiscal money by public employers, PSWS tends to be inherently inflationary. Yet, the article posits that extent to which wage inflation occurs in the public sector hinges on the institutional properties of PSWS governance systems. Systematic wage restraint occurs within systems where PSWS authority is delegated to a state actor – either the Finance Ministry or an independent agency – with an organizational mandate and powers to ensure PSWS be conducted in the general interest rather than in response to public sector groups’ narrow interests. The argument is demonstrated by leveraging an original combination of most-similar and most-different case studies combined with archival research and elite interviews. The findings advance our understanding of the political economy of wage restraint in Europe and highlight the key role state actors and institutional structures play within growth regimes.