Abstract
The paper uses a new country-level, panel data set to study the effect of public sector wages on corruption. The results show that wage inequality in the public sector is an important determinant of the effectiveness of anti-corruption policies. Increasing the wages of public officials could help reduce corruption in countries with low public sector wage inequality. In countries where public sector wages are highly unequal, however, raising the wages of government employees could increase corruption. These results are robust to a wide range of empirical model specifications, estimation methods, and distributional assumptions. The relation persists when controlling for latent omitted variables, using the share of contracts in the private sector as an instrument for the public-private wage differential. Combining increases in public sector wages with policies affecting the wage distribution could help policy makers design cost-effective programs to reduce corruption in their countries.
Highlights
Anti-corruption policies in many countries rely on the notion that corruption is caused by low wages in the public sector
Our findings suggest that the distribution of wages in the public sector could be an important determinant of the effectiveness of anti-corruption policies
We considered using three other indicators of corruption: the Absence of Corruption component of the World Justice Project’s (WJP) Rule of Law Index (World Justice Project 2020), the Anti-Corruption Policy component of the Bertelsmann Transformation Index (BTI) (Bertelsmann Stiftung 2020), and the Corruption component of the International Country Risk Guide (ICRG) (PRS Group 2020)
Summary
Anti-corruption policies in many countries rely on the notion that corruption is caused by low wages in the public sector. Available cross-country data from the Worldwide Bureaucracy Indicators database allow us to address many of these problems and present new results on the effectiveness of increasing wages as an anti-corruption measure. Most cross-country studies of corruption and wages rely on macro-level data to derive the publicprivate wage premium (e.g., Van Rijckeghem and Weder 2001, An and Kweon 2017, Treisman 2000). Such an approach is associated with persistent measurement errors and fails to control for age, gender, education, location, and other individual characteristics in deriving the public wage premium (Schiavo-Campo et al 1997, Le et al 2018).
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