Fringe Benefits, Self-Selection, and the Public/Private Compensation Differential

Abstract

Across developing countries, many workers strive for public sector jobs. Is this because public sector workers receive higher compensation than comparable private sector workers? This study addresses this question looking at broad measures of compensation that encompass wages as well as non-wage fringe benefits such as paid leave and access to social insurances. Using detailed labour force data for Bhutan, it combines Oaxaca type decompositions of compensation differentials into characteristics and coefficients effects with multinomial logit models for self-selection into labour force participation and the public or private sector. The study finds that public/private wage differentials are sizeable but can entirely be accounted for by observable characteristics (in particular by differences in the average educational attainment and industrial structures). A sizeable public/private differential in fringe benefits related to leave can also be accounted for by differences in observable characteristics between public and private sector workers. However, this is not the case for the differential in non-leave-related fringe benefits. Instead, differentials in non-leave-related fringe benefits are largely due to coefficients effects, strongly suggesting that preferences for public sector jobs are at least in part the result of pronounced intersectoral differentials in such benefits.