This Working Paper critically reviews the empirical evidence and the basic assumptions on which European and national policymakers base their strategy of cutting and freezing public sector pay as one central element of the current crisis management. Using comparative studies and new statistical data, the paper demonstrates that these assumptions are wrong, as they rely on a 'excessively narrow conception of competitiveness as cost competitiveness' and they neglect the role of wages in generating domestic demand.

The paper concludes that driving down public sector wages is not the right recipe to get out of the crisis and underlines the need for a strong public sector to boost aggregate demand and provide a modern public infrastructure as major precondition for a competitive economy.

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