Abstract
We suggest an identification strategy for the private-public sector wage gap to correct for the bias resulting from the heterogeneity of unobservable characteristics between shifters and stayers. The analysis applies a fixed effect difference-in-difference model with event study design to estimate the wage gap. As the parallel wage trend assumption between shifters from the public to the private sector and public sector stayers is rejected, late shifters still in the public sector are used as counterfactual group for early shifters. The estimates are based on rich register data for high-educated workers in Norway 1993–2010. Using this novel identification method, we show that due to positive selection, the private-public wage gap is overestimated by about 20% in the standard model comparing shifters with stayers. In an extension of the analysis, we show that the overestimation is the same for male and female workers and is robust across business cycles, although the size of the wage gap is pro-cyclical.
Highlights
The private-public wage gap is important for the understanding of public sector finances and the working of labor markets
The overestimation bias represents a positive selection of shifters to the private sector compared to stayers in the public sector
The difference-in-difference model described by equation (1) in section 2 allows for a comparison of shifters to the private sector and stayers in the public sector over time
Summary
The private-public wage gap is important for the understanding of public sector finances and the working of labor markets. The identification of the gap can be based on shifters between the private and the public sector in models with worker fixed effects. Given identification based on comparison of early versus late shifters, the estimated privatepublic wage gap equals 10% (comparing three years before and three years after the shift year). As a check of robustness, and to exploit more data than in our analysis of shifters, we try out an alternative identification strategy exploiting that the recruitment to the public sector differs across the business cycle. This can be understood as a difference-in-difference-indifference model separating between private-public shifters recruited in booms versus recessions.
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