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Abstract

This paper analyzes the role of public sector wage-setting (PSWS) in Mediterranean countries before and after the Eurozone crisis. Extant literature suggests public sector wage inflation to be the norm in these countries due to the lack of institutional preconditions for wage restraint and the role of PSWS in shoring up the publicly financed domestic demand-led growth regime. Yet, the cases of France, Italy, Portugal and Spain do not to neatly fit these predictions, showing instead notable cross-country and intra-country diachronic variation. We provide an alternative account by treating PSWS as fiscal policy under EMU. Variation in PSWS outcomes before the Eurozone crisis is best explained in terms of the institutions governing PSWS. In France and Portugal, PSWS is highly centralized at the national level, and a strong Finance Ministry plays a central role in the oversight of PSWS to ensure budgetary discipline. To the contrary, Italy and Spain underwent processes of disorganized decentralization of PSWS through the 1990s and 2000s, leading to fragmented – and often clientelist – practices resulting in disorderly inflationary wage increases across the country. After the sovereign debt crisis, all countries relied on restrictive PSWS to support internal devaluation and fiscal adjustment, though with different intensity related to the country-specific problem load and external constraints.