Interactions Between Public and Private Sector Wages and Inflation in Mongolia

The substantial increase in public sector wages in Mongolia introduced in the 2023 supplementary budget has raised concerns about its potential spillover effects on private sector wages and subsequent inflationary pressures. Furthermore, both public and private sector wages have grown on average faster than labor productivity in Mongolia during 2000-2023 with substantial implications for inflation. This paper aims to empirically investigate the relationship between public sector wages, private sector wages, and inflation in Mongolia, utilizing a quarterly dataset spanning from 2000Q4 to 2023Q4. Employing a structural vector autoregression (SVAR) model, we analyze the dynamic interactions among these variables to uncover the causal relationships. The findings indicate that a shock to private sector wages exerts a stronger immediate impact on inflation, peaking within the first four quarters, while a shock to public sector wages manifests a delayed effect on inflation, peaking between the sixth and ninth quarters. Additionally, shocks to public sector wages have a small and short-lived effect on private sector wages, whereas shocks to private sector wages significantly influence public sector wages, suggesting that private sector has a more leading role in wage setting behavior. These results have important policy implications, highlighting the need for public wage policies that are closely aligned with productivity changes and can contribute to macroeconomic and price stability in Mongolia.