Aggregate Public-Private Remuneration Patterns in South Africa

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Aggregate Public-Private Remuneration Patterns in South Africa Andreas Wörgötter 1

& Sihle

Nomdebevana 2

# The Author(s) 2020

Abstract This paper investigates the public-private remuneration patterns in South Africa with time-series methods for the first time since the introduction of an inflationtargeting framework in 2000. Co-integration tests and analysis confirm that there is a stable, long-run relationship between nominal and real remuneration in the public and private sector. The adjustment to the deviations from this long-run relationship is strong and significant for public-sector remuneration, while private-sector wages neither respond to deviations from the long-run relationship nor lagged changes in publicsector remuneration. The causal direction from private- to public-sector remuneration does not change if real earnings are calculated with the gross domestic product deflator. This is confirmed by simple Granger-causality tests. Keywords South Africa . Remuneration pattern . Public sector earnings . Private sector earnings . Co-integration . Granger causality . Dutch disease JEL C32 . E64 . J31

Introduction This paper provides an empirical investigation into the nature of remuneration pattern outcomes in South Africa by examining the relationship between public- and privatesector wages. It complements studies that are concerned with structural differences * Andreas Wörgötter [email protected]

1

Institute of Statistics and Mathematical Methods in Economics, University of Technology, Vienna, Austria

2

South African Reserve Bank, Pretoria, South Africa

Wörgötter A., Nomdebevana S.

between public- and private-sector employment and remuneration (Bosch 2006; Mavromaras et al., 2017). The empirical and theoretical literatures suggest a relationship between public- and private-sector wages. The direction of causality is tested using Granger-causality analysis and applying vector-error-correction models (VECMs) with quarterly data from South Africa for the period 2000 to 2016. Remuneration patterns constitute an important linkage between the micro- and macro-spheres of the economy. On the microlevel, they reflect the incentives and constraints for individual decisions about how many hours to work and which wage to accept. On the macrolevel, wage dynamics have important consequences for inflation, unemployment and, through work experience, productivity. Together, this affects the sacrifice ratio or, in other terms, the real costs needed to maintain price stability. For instance, in a bargaining system with more than one trade union, wage leadership reduces the effective number of independent trade unions and increases the degree of centralisation of wage bargaining. Assuming that the leading trade union has some degree of inflation aversion, this could allow the central bank to be more accommodative while simultaneously reducing inflation and unemployment to their lowest socially optimal levels (Coricelli et al., 2006). Without referring to monetary policy regimes, either completel