Are public sector workers in developing countries overpaid? Evidence from a new global dataset

Rong Shi,David Newhouse,T.H Gindling,Zahid Hasnain

doi:10.1016/j.worlddev.2019.104737

Abstract

This paper examines the public sector wage premium using nationally representative household surveys from 91 countries. The public sector generally pays a wage premium compared to all private sector salaried employees, but the size of the premium is sensitive to the choice of the private sector comparator and varies considerably by worker characteristics. For most countries, the average premium disappears when the public sector is compared to only formal sector private employees, especially when controlling for occupation. The public sector wage premium is higher for women and low-skilled workers. In contrast, high-skilled public sector employees are most often paid the same as their private sector counterparts or may even pay a penalty for working in the public sector. Consistent with this, the public sector premium is greater for employees with less education, those working in lower paid occupations, and those whose earnings fall in the lower part of the conditional earnings distribution. Across countries, the wage premium is only weakly associated with countries? level of development. These findings nuance the existing consensus that public sector workers tend to enjoy a significant wage premium over their private sector counterparts, and that this premium is especially large in low-income countries.

Highlights

The incentives and abilities of the personnel employed in government bureaucracies largely determine a state’s capability to effectively implement policies and efficiently achieve the desired outputs in regulation, infrastructure provision, and service delivery
We find that the public sector generally pays a premium compared to all private sector salaried employees, even after controlling for a small set of observed worker characteristics, but that the size of the premium is sensitive to the choice of the private sector comparator and varies for different types of workers
There is a rich literature on Overall public‐private wage premiums that focuses largely on high‐income countries

Summary

Introduction

The incentives and abilities of the personnel employed in government bureaucracies largely determine a state’s capability to effectively implement policies and efficiently achieve the desired outputs in regulation, infrastructure provision, and service delivery. The jobs approach compares pay for a sample of similar public and private sector jobs and ignores the characteristics of the workers employed in the jobs This approach necessarily entails limiting the benchmarking to large, formal sector firms, often multinationals, that explicitly classify jobs, and tends to find large public sector wage penalties. This study instead follows the more common “worker approach” to estimating public sector premiums, which compares the earnings of public and private sector workers reported in household surveys after controlling for observed predetermined worker characteristics This approach, suffers from significant limitations, including the omission of important determinants of worker productivity such as skills and motivation that are not observed in the data.

Data and Descriptive Statistics

Empirical Strategy

Results and Discussion

Conclusion