Scand. J. of Economics 114(1), 228–244, 2012 DOI: 10.1111/j.1467-9442.2011.01665.x Public or Private Sector Wage Leadership? An International Perspective ∗ Ana Lamo European Central Bank, DE-60311 Frankfurt am Main, Germany ana.lamo@ecb.europa.eu Javier J. P´ erez Bank of Spain, 28014 Madrid, Spain javierperez@bde.es Ludger Schuknecht European Central Bank, DE-60311 Frankfurt am Main, Germany ludger.schuknecht@ecb.europa.eu Abstract Whether a government acts as a wage leader, placing pressure on private-sector wages (more open to competition), or whether it plays a passive role and merely follows wage negotia- tions in the private sector, there are important implications for macroeconomic development, particularly in small open economies and/or countries that are members of a monetary union, such as those of the European Monetary Union. With the notable exception of the case of Sweden, opinion on this issue is still divided. In this paper, we look at public- and private- sector wage interactions from an international perspective (18 OECD countries). We focus on the causal two-way relationship between public and private wage setting, confirming that the private sector, on the whole, appears to have a stronger influence on the public sector, rather than vice versa. However, we also find evidence of feedback effects from public wage setting, which affect private-sector wages in a number of countries. When the private sector takes the lead on wages, there are few feedback effects from the public sector, while public wage leadership is typically accompanied by private-sector feedback effects. Keywords: Government wages; private-sector wages; wage leadership; causality JEL classification: C32; J 30; J 51; J 52; E62; E63; H 50 ∗ The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank (ECB) or the Bank of Spain. Special thanks go to two anonymous referees for their detailed comments. We also thank J. von Hagen, H. Lebihan, M. Lindquist, D. J. Pedregal, A. van Riet, C. Robalo-Marques, P. Rother, A. J. S´ anchez, F. Smets, and participants at the Wage Dynamics Network (WDN) Macro Group and various seminars and conferences for helpful comments. C  The editors of The Scandinavian Journal of Economics 2011. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.