Abstract
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%, with larger spillovers in municipalities with a larger share of public workers. It also reduces the young population by 0.4%, suggesting a welfare decline based on spatial equilibrium and a decrease in private-sector labor demand.