Understanding the public sector pay gap

Maria M Campos,Evangelia Papapetrou,Roberto Ramos,Domenico Depalo,Javier J Pérez

doi:10.1186/s40173-017-0086-0

Maria M Campos, Evangelia Papapetrou + Show 3 more

Open Access

https://doi.org/10.1186/s40173-017-0086-0

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Abstract

We uncover the short- and long-run structural determinants of the existing cross-country heterogeneity in public-private pay differentials for a broad set of OECD countries. We explore micro data (EU-SILC, 2004–2012) and macro data (1970–2014). Three results stand out. First, when looking at pay gaps based on individual data, more than half of the cross-sectional variation of the sample can be accounted for by the degree of exposure to international competition, as well as by the size of the public sector labor force and its composition (i.e., the intensity in the provision of pure public goods), while labor market institutions play a very limited role. Second, we find that in some countries, pay gaps have narrowed down significantly during the recent financial crisis, this decrease being explained by the widespread process of fiscal consolidation rather than by changes in the previous factors. Third, we show that in the log run, openness to international trade and improvements in the institutional quality of governments are associated with decreases in the public-private wage gap. Our findings can be rationalized by a body of research stressing noncompetitive wage settlements in the public sector.

Highlights

In this paper, we empirically study the short- and long-run structural determinants of the existing cross-country heterogeneity in public-private pay differentials for a broad set of OECD countries
In view of the theories highlighting wage-setting institutions, we expect that countries with a higher protection of employment will exhibit higher public pay gaps, since the better the conditions to work in the private sector, the higher the required wages in the public sector in order to attract workers
We find support that the government monopolistic power explains a large part of the cross-country variation in the public pay gap, at least in our sample of 25 European Union (EU) countries

Summary

Introduction

We empirically study the short- and long-run structural determinants of the existing cross-country heterogeneity in public-private pay differentials for a broad set of OECD countries. It has been argued that politicians use public employment for redistributive purposes, directing income towards disadvantaged groups, or that politicians are likely to link public wage agreements to election cycles.8,9 Another set of theories stresses the fact that labor market institutions differ markedly between the public and the private sectors. European Commission (2014) provides simple rank correlations between public wage gaps estimated with 2010 data for 26 European Union (EU) countries and some country characteristics, such as labor market institutions and the size of the government as an employer They find a positive correlation between the public-private wage gap and employment protection legislation, and conjecture that this might arise because higher compensations are needed to make public employment attractive when private employment is more strongly protected.

Data and variables

The determinants of the public-private wage gap

Findings

Conclusions