2025 Reports

Wage Spillovers across Sectors: Evidence from a Localized Public-Sector Wage Cut

Goto, Tsuyoshi; Yamagishi, Atsushi

We study how institutional wage reforms in one sector spill over to other sectors by analyzing the public sector. We leverage the Japanese policy reform that cut public-sector wages only in certain municipalities and the institutional setting in which only young workers are eligible for public-sector jobs. We find that a 1% public-sector wage cut reduces the private-sector wages of young workers by 0.3%. This spillover elasticity is greater when public-sector jobs are more important as workers’ outside options. We also find that the migration outflow of young workers, consistent with the decline in their welfare in spatial equilibrium.

Keywords: spillover, wage reform, public sector, local labor market, Japan.

JEL classification: H72, J31, J38, R13, R50.