Public-Private Wage Gap: Case of North Cyprus

Abstract

Segmentation has often been referred to as the principal characteristics of the labour market in developing countries. In North Cyprus at the initial stage of its economic development the focus of public investment policy was the creation of state economic enterprises (SEEs) in agriculture, tourism and manufacturing industries. As a consequence of SEE-focused development policy, and limited job opportunities in the private sector, the government became the biggest employer in the North Cyprus labour market. Even after the privatization of most of the SEE’s in 1986 with the liberalization of the economy, the government continues to be the biggest employer, employing one third of the employed people (30.5%) in 2008. Despite considerable public investment on physical and social infrastructure private sector development remains handicapped by lack of access to foreign markets, lack of capital, and low private sector investment. Hence, private sector employment also remains handicapped. Around 90% of private sector establishments are micro-enterprises. 42% of the private sector employment is created by these enterprises. Hence North Cyprus labour market, offers two distinct types of employment opportunities as public and private sector employment. Public sector employment offers high wages, good working conditions, stable employment, favourable social security/retirement schemes and promotion opportunities. Private sector employment offers low wages, heavy working conditions, high labour turnover, longer working hours, and limited promotion opportunities, unfavourable social security scheme, or no social security scheme. It seems as if people employed in public and private sectors operate in different labour markets. In other words there are evidences that North Cyprus labour market segmented as public and private sectors.This study aims at, by investigating wage determinants and wage gap between public and private sector, to discuss segmentation of the North Cyprus labour market.First fold of the study investigating the factors determining wages of the public and private sector workers. For this, wage equations are estimated using the Least Squares Estimation Method. Preliminary results show that age, education, gender, marital status and experience are some of the statistically significant determinants for both the private and the public workers, with different parameters. Some other factors like daily/monthly basis wage classification are found to be significant only for one group of workers. The second fold of the study analyzing the wage gap between public and private sector workers. Through the analysis it is estimated that private workers’ average wage is around 58% of the public workers average wage. This gap is further decomposed into two parts, one due to different levels of personal and job characteristics and the other as a result of the wage discrimination between the two sectors. The mentioned decomposition is done through Oaxaca and Ransom decomposition method. First findings indicate that 86% of the wage difference is due to the workers’ personal and job characteristics, and the remaining 14% reveals the wage discrimination. In addition, public workers’ average wage is estimated as 8% more than the overall average wage and private workers’ average wage is estimated as 6% less than the overall average wage.The analysis employs micro-data from the recent (2006) Household Employment Survey conducted by the State Planning Office of TRNC.