The federal-private wage differential: how has it evolved?

Abstract

ABSTRACT This paper is the first to document and analyse the variation of the federal-private pay differential over time. We estimate the evolution of the federal-private pay differential from 1995 to 2017 using Current Population Survey data, enabling us to examine the current pay gap and how it has changed. To do so, wage regressions are estimated by year and used to calculate the yearly federal-private wage differential. To deal with unobserved heterogeneity, we adopt control function methods. We also estimate the probability of receiving employer-provided health insurance and a pension plan each year for each sector. The findings imply that the federal pay differential is invariably positive, but has varied substantially. We examine the reasons for this variation and find that the most robust result is the positive effect of federal spending as a share of GDP, ipromplying that a 1 percentage point increase in federal spending as a share of GDP raises the federal pay differential by 1.3 to 1.75 percentage points.