Public–private sector wage differentials and the business cycle

This paper uses microeconomic data for the period from 1990 to 2004 to examine the relationship between public–private sector wage differentials and labour market conditions in Finland. The results show that the public sector wage premium is strongly counter-cyclical. On average, a 10 percent increase in the local unemployment rate increases the public–private sector wage gap by one percent. Separate analyses by government sector and quantiles of the distribution of wages reveal that it is local government workers and those working at lower skill levels who benefit more from increasing unemployment rate. The paper also exploits the longitudinal structure of the data to examine whether the results are constant over time. These results indicate that the cyclical pattern primarily emerges in years with deteriorated labour markets.     

Public–private wage gap in Latin America (1992–2007): A matching approach

Using matching methods, we estimate the public–private wage gap for urban workers in eleven Latin American countries for the 1992–2007 period. These methods do not require any estimation of earnings equations and hence no validity-out-of-the-support assumptions; furthermore, this approach allows us to estimate not only the average wage gap but also its distribution. Our main findings indicate that the average public sector worker earns more than his/her private counterpart, and that this differential increased over the 1992–2007 period. Important differences along the wage distribution are also shown in the results; in fact, public servants in the highest percentiles of the wage distribution generally earn less than their private sector equivalents. Nonetheless, the percentile at which a positive wage gap becomes a wage penalty shifted over the period as the average wage gap experienced by most countries widened. Still, the most qualified public sector workers do face a wage penalty. Furthermore, indicators of government effectiveness show no relationship with the country ranking according to the public–private wage gap.     

Union effects on pay levels in Britain

The contraction of union representation in Britain raises the question of whether or not unions still achieve a wage premium. Analysis of matched employer–employee data from the 1998 Workplace Employee Relations Survey shows that there is now no demonstrable premium for private sector workers in general. However, unions do achieve a wage premium of around 9% for about half of employees covered by collective bargaining arrangements. The effect of union bargaining spills over to other employees in the same workplaces. The paper identifies circumstances where union effects are strongest—employer endorsement of union membership, high collective bargaining coverage and multi-unionism.     

UNION WAGE DIFFERENTIALS IN AN ERA OF DECLINING UNIONIZATION†

ABSTRACT This paper examines the change in union wage differentials in Britain between 1984 and 1990, a period of considerable legislative change and marked decline in unionization. Small falls in union differentials are found for manual workers, together with a sharp decline in the premium associated with, and incidence of, the pre-entry closed shop. The decline in the average differentials is found to be largely due to the inability of unions to establish differentials in new establishments. No link is found between the differential and the probability of closure and no evidence of decline in raw differentials in a matched panel.     

Pre-crisis reforms,austerity measures and the public-private wage gap in two emerging economies

This paper analyzes crisis adjustments of the public and private sectors in two emerging market economies, Croatia and Serbia, during the 2008–2011 period. It focuses on public-private wage gaps at the onset of and during the crisis, decomposed into structural and composition effects using an extension to the Oaxaca-Blinder method based on Recentered Influence Function (RIF) regressions and reweighting. The main results indicate that at the beginning of the crisis public sector workers in both countries enjoyed a significant wage premium, with the premium in Serbia being about three times higher than in Croatia. During the crisis, both countries experienced a similar increase of the premium, with Croatia reaching the size of gap usually estimated for EU countries, while Serbia stayed largely ahead. The results also show that the wage distribution in the public sector is more compressed than in the private sector in both countries, which is further exacerbated by the crisis. Despite the introduced austerity measures, public sector workers continue to enjoy well-protected and privileged jobs in terms of wages relative to their private sector counterparts. Structural reforms undertaken prior to the crisis played a decisive role in determining the countries’ responses to the crisis.     

Government wage differentials

This paper shows that public sector wages usually exceed private but the size and composition of the differentials depend on sex and level of government. Using a technique derived from the literature on sex discrimination, these differentials are decomposed into a portion attributable to differences in productivity between the two types of workers and a portion ascribed to economic rent. This rent results from public workers' relatively greater political influence in the government wage-setting process and a systematic upward bias in public wages imparted by present government pay policy.     

WHAT HAS 20 YEARS OF PUBLIC–PRIVATE PAY GAP LITERATURE TOLD US? EASTERN EUROPEAN TRANSITIONING vs. DEVELOPED ECONOMIES

This paper surveys the literature on public–private sector pay differentials based on 20 years of research in transitioning countries of Eastern Europe (EE) and compares the results with estimates obtained from developed market economies. The majority of empirical studies from EE economies found evidence of public sector pay penalties during the period of economic transition from a communist to market‐based economy. In developed economies, however, the average differential is usually around zero or positive. The public sector pay inequality reducing effect relative to the private sector is greater in transitioning economies than in developed economies. Nevertheless, there is evidence that the sign of the public sector pay gap as well as the relative public sector pay distribution change with the progress of economic transition towards those usually observed in developed economies. Different pay‐setting arrangements between private and public sectors and competition for workers seem to be major arguments for the existence of systematic pay differences between the two sectors.     

Union wage premiums in Great Britain: Coverage or membership?

This paper presents estimates of union wage premiums for Great Britain and distinguishes between union membership and union coverage effects on wages. For this purpose a panel data system estimator is applied to data from the British Household Panel Survey.For female workers a coverage premium of 6.1% is estimated whilst no evidence of a union membership premium is found. This result lends support to the by-product theory of Olson (1965) [Olson Jr., M., 1965. The logic of collective action. Harvard University Press, Cambridge (Mass.)]: if female covered members receive other private benefits than a higher wage from the union the coverage premium could be viewed as a by-product. For male workers no evidence is found of a membership premium nor a coverage premium. To investigate potential bias in the estimated union effects particular attention is paid to measurement error in union membership and the inclusion of job-changes in the sample.     

The returns to formality and informality in urban Africa

This paper addresses the questions as to the size and causes of earnings differentials in two urban African labor markets, those of Ghana and Tanzania. We have panel data so we can ask how far time invariant unobservables, market ability for short, matters in the determination of earnings. We also have information on whether the individual is own self-employed, self-employed with employees, a private or public sector wage employee and the size of the enterprise in which wage employees work or which the self-employed owns. We find, mirroring work on developed economies, that unobserved individual market ability is by far the most important factor explaining the variance of earnings. With controls for such ability the gap between private wage employment and civil servants is about 50%. With controls for enterprise size we find that wage employees earn the same as the self-employed in both Ghana and Tanzania. Enterprise size matters. At most half of the OLS effect of size on earnings can be explained by unobservable ability. Workers in the largest firms are the high earners with wage rates which exceed those of civil servants. These results all assume exogenous movement. We find evidence that endogeneity bias may be serious and may be understating the extent of both the size effect and the private sector wage (negative) premium. The implications of our results for understanding the nature of formal and informal employment in Africa are discussed.     

Wage determination in the union and nonunion sectors.

This study contains estimates of wage equations for white male union and nonunion employees. The authors find that nonunion wages are generally more responsive than union wages to individuals' education and experience and to regional price-level variation. Despite those differences, however, estimates of union-nonunion wage differentials based on these separate equations do not differ greatly from a differential obtained from a union dummy variable in an equation based on combined union and nonunion observations. Union-nonunion differentials vary widely across occupational groups and are generally larger in the lower skilled and more highly unionized occupations. The results for manufacturing, for which additional industry data are available, indicate a negative impact of high concentration ratios on the wages of all workers and a greater impact of establishment size on nonunion than on union wages. Data were drawn from the May 1973 Current Population Survey.     

Trade union membership and dismissals

In Germany, there is no trade union membership wage premium and a membership fee of 1% of the gross wage. Therefore, prima facie, there are strong incentives to free-ride on the benefits of trade unionism. We establish empirical evidence for a private gain from trade union membership which has hitherto not been documented: in Western Germany, union members are less likely to lose their jobs than non-members. In particular, using data from the German Socio-Economic Panel we are able to show that roughly 50% of the observed raw differential in individual dismissal rates can be explained by the estimated average partial effect of union membership.     

Towards a theory of the labor market with a public sector

The object is to specify and analyze equilibrium in a labor market with frictions when there is a significant public sector. In the vast majority of equilibrium studies on labor markets, a public sector has been ruled out by assumption. This seems a strange oversight as about 17% of workers in the US are public sector workers, whereas in western Europe, approximately 22% of workers work in the public sector. The goal in this study is to provide answers to such questions as: what happens to private sector wages if the public sector is increased? If the Government increases the number of public sector jobs, does this crowd out private sector jobs? When will private sector wages be greater (less) than the public sector wage? Reasonably complete answers to these questions (and others) are provided within the context of the model developed.     

Identification issues in the public/private wage gap,with an application to Italy

This paper reviews some of the standard assumptions that are imposed in order to estimate the average public/private wage gap and that are mainly related to the possible selection of the sector. There are two contributions to the existing public/private wage gap literature. One is a better understanding of the identified parameters: standard estimators identify a local effect (LATE), which in general cannot be generalized to the entire population, as instead is almost always done. The other is the partial identification of the population average treatment effect, with an instrumental variable. To the best of my knowledge, this is the first paper in this literature that employs bounds. The technique is applied to male workers in Italy. For compliers, LATE estimates a wage advantage from working in the public sector greater than 30%. This return is within the narrowest bounds on the population average treatment effect that are consistent even with a much smaller gap (about 15% or more).     

Wages,Prices and Politics: Evidence from Norway

This paper studies the empirical relevance of the close ties between a central trade union and the social democratic political party using time series data for Norway. Using a structural wage-price model we estimate that changing from a bourgeois to a social democratic government reduces manufacturing wages in the long run by 2.3 percent. This result is consistent with a wage bargaining model augmented by political preferences of the union leaders. Private service wages are not directly affected by government type, but wage spillover effects imply that the long-run dampening effect in the private service sector is around 2 percent. The results also support the proposition of the Scandinavian model of inflation that the traded goods sector is the wage leader.     

Indexation and Wage Change Settlements: Evidence from Spanish Manufacturing Firms

An endogenous switching model of ex-ante wage changes under indexed and non-indexed settlements is estimated for the Spanish manufacturing sector using collective bargaining firm data for the 1984–1991 period. The likelihood of indexing the settlement is higher for nationwide unions than for other union groups within the works council and increases with the expected level of inflation. For wage change equations, a common structure for indexed and non-indexed settlements is strongly rejected, showing a source of nominal rigidity. For indexed contracts, the expected ex-ante total inflation coverage is nearly complete. It is also shown that workers pay a significant ex-ante change premium (differential) to obtain a cost of living allowance clause. However, the realised contingent compensation exceeds such a premium for all industries. Finally, important spillover efffects in wage setting and the decision to index the settlement have been detected.     

On Kin Groups and Wages in the Ghanaian Labour Market

A common feature of African societies is that individuals belong to kin groups which impose reciprocal obligations upon their members. In the modern economy, where large scale production is required, forms must employ multiple kin groups. In such cases kin groups will try to favour their own members in the assignment of good jobs. We analyze the effects of kin group patronage in the modern sector. We set out a model in which kin group favouritism is shown to give rise to a wage premium for the largest kin group. We then use an unusually rich data set from Ghana to test for kin group favouritism, empirically distinguishing it from 'taste for discrimination'. We find that in the private sector there is no evidence for kin group patronage and earning functions (corrected for selection into the various sectors) reveal that workers are paid according to their human capital attributes. By contrast, public sector workers are rewarded for their credentials and membership of the right kin group, not for their productive characteristics. The kin group premium is about 25 percent and is statistically robust to alternative specifications.     

The impact of matching mission preferences on well-being at work

A recent literature in economics assumes that workers differ in their mission preferences. These studies predict a premium on the matching of mission preferences between a worker and employer. This paper uses data from the Dutch LISS panel to examine this prediction for government workers. Results show that government workers report higher satisfaction with the type of work they do when their political preferences match those of the political parties in office as compared to when their political preferences do not match. A match of political preferences has no effect on the work type satisfaction of workers employed outside the government sector.     

The impact of minimum wages on wages,work and poverty in Nicaragua

In this paper we use an individual- and household-level panel data set to study the impact of changes in legal minimum wages on a host of labor market outcomes including: a) wages and employment, b) transitions of workers across jobs (in the covered and uncovered sectors) and employment status (unemployment and out of the labor force), and c) transitions into and out of poverty. We find that changes in the legal minimum wage affect only those workers whose initial wage (before the change in minimum wages) is close to the minimum. For example, increases in the legal minimum wage lead to significant increases in the wages and decreases in employment of private covered sector workers who have wages within 20% of the minimum wage before the change, but have no significant impact on wages in other parts of the distribution. The estimates from the employment transition equations suggest that the decrease in covered private sector employment is due to a combination of layoffs and reductions in hiring. Most workers who lose their jobs in the covered private sector as a result of higher legal minimum wages leave the labor force or go into unpaid family work; a smaller proportion find work in the public sector. We find no evidence that these workers become unemployed.Our analysis of the relationship between the minimum wage and household income finds: a) increases in legal minimum wages increase the probability that a poor worker's family will move out of poverty, and b) increases in legal minimum wages are more likely to reduce the incidence of poverty and improve the transition from poor to non-poor if they impact the head of the household rather than the non-head; this is because the head of the household is less likely than a non-head to lose his/her covered sector employment due to a minimum wage increase and because those heads that do lose covered sector employment are more likely to go to another paying job than are non-heads (who are more likely to go into unpaid family work or leave the labor force).     

The government wage bill and private activity

We estimate the macroeconomic effects of public wage expenditures in U.S. data by identifying shocks to public employment and public wages using sign restrictions. We find that public employment shocks are mildly expansionary at the federal level and strongly expansionary at the state and local level by crowding in private consumption and increasing labor force participation and private sector employment. Similarly, state and local government wage shocks lead to increases in consumption and output, while shocks to federal government wages induce significant contractionary effects. In a stylized DSGE model we show that the degree of complementarity between public and private goods in the consumption bundle is key for explaining the observed heterogeneity.     

After, before and during: returns to education in Hungary (1986–1998)

How valuable are the skills acquired under socialism in a market economy? This paper throws light on this question using unique data covering the years before and during transition (1986–1998) for about 3 million Hungarian wage earners. We find that returns to a year of schooling increased by 75% from 6.4% in 1986 to 11.2% in 1998. We also find that the private sector rewards formal education more than the public and, in terms of gender, although in 1986 women had greater returns to schooling than men, by 1998 this difference had been eliminated.