Market and political power interactions in Greece: An empirical investigation

In this paper, we examine a dynamic panel of 21 Organisation for Economic Co-operation and Development (OECD) countries, primarily using annual data from OECD Economic Outlook no. 90 from a maximum time span of 1970 to 2010. We find that, unlike the other OECD countries in the sample, wage setting institutions, competition conditions, public finances and external imbalances can account for the behavior of the public sector wage premium (WPR) and the self employed taxation gap (TSL) in Greece (and to a lesser extent in Spain and Portugal) in a manner that is consistent with an “insiders-outsiders society” (IOS). IOS is a politicoeconomic system characterized by groups of selfish elites that enjoy market power, but at the same time cooperate in influencing government in protecting and promoting their collective self interests. We find that for Greece, as well as Spain and Portugal, WPR and TSL have an adverse effect on both total factor productivity (TFP) and output growth. Finally, the effect of WPR and TSL on the business cycle (shock propagation mechanism) is investigated via a panel vector autoregression (VAR) analysis. Again, impulse response function analysis suggests that the shock propagation mechanism of WPR and TSL for Greece (and to a lesser extent for Spain and Portugal) are quite different from the rest of the OECD countries. For example, in Greece, a positive temporary shock in WPR causes TFP and output to fall and the public and current account deficits to increase. We interpret the TFP/output growth and the shock propagation mechanism results to provide strong evidence that the three countries (Greece, and to a lesser extent, Spain and Portugal) behave like IOS. These results are important in order to understand the Greek crisis.