Abstract
ABSTRACTThis study investigates the public–private sector wage gap in Latvia using microdata from the labour force survey. The severity of public sector wage cuts employed as a response to the economic crisis and subsequent recovery provides a test bed to analyse whether and how the public–private sector wage gap has adjusted after consolidation-driven wage cuts. Findings reveal that the observed wage gap is slightly in favour of the public sector; however, once differences in individual characteristics and selection effects are considered, results point to a private sector wage premium. Findings also suggest that the private sector wage premium has increased since the pre-crisis period. A significant private sector wage premium raises doubts on whether a system that is reliant on discretionary fiscal measures is efficient enough in eliminating unwarranted differences in wage. In particular, whether a re-adjustment process of public sector wages works after consolidation-driven wage cuts.
Highlights
Investigating public–private sector wage differentials has regained the importance in the context of recent economic crisis when governments across Europe had to engage in considerable consolidation efforts, including public sector wage cuts, to achieve sustainable budgetary positions
The severity of public sector wage cuts employed as a response to the economic crisis and subsequent recovery provides a test bed to analyse whether and how the public–private sector wage gap has adjusted after consolidation-driven wage cuts
A significant private sector wage premium raises doubts on whether a system that is reliant on discretionary fiscal measures is efficient enough in eliminating unwarranted differences in wage
Summary
Investigating public–private sector wage differentials has regained the importance in the context of recent economic crisis when governments across Europe had to engage in considerable consolidation efforts, including public sector wage cuts, to achieve sustainable budgetary positions. Economic recovery following the crisis has been accompanied by wage growth in both public and private sector, which creates promising conditions to analyse whether (and how) the public–private sector wage gap adjusts after consolidation-driven wage cuts. This might be interesting considering that public sector wages in Latvia are set with discretionary decisions.. Drawing conclusions solely from the observed (unconditional) wage gap might be misleading, and accounting for differences in observable characteristics is an essential part of the assessment of wage gaps Another aspect that has seen increasing importance is the sample selection bias which is prone to arise from the non-random nature of employment and sector choices. The last section concludes with a summary and discussion of the findings
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