We develop and estimate a structural model that incorporates a sizable public sector in a labor market with search frictions. The wage distribution and the employment rate in the public sector are taken as exogenous policy parameters. Overall wage distribution and employment rate are determined within the model, taking into account the private sector's endogenous response to public sector employment policies. Job turnover is sector specific and transitions between sectors depend on the worker's decision to accept alternative employment in the same or different sector by comparing the value of employment in the current and prospective jobs. The model is estimated on British data by a method of moments. We use the model to simulate the impact of various counterfactual public sector wage and employment policies. * The authors would like to thank Jim Albrecht, Eric Smith and Susan Vroman, as well as conference and seminar audiences in Aarhus, Constance, Bristol, and the Tinbergen Institute. The usual disclaimer applies.† Corresponding author. Address:

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in The Public Pay Gap in Britain: Small Differences That (Don't?) MatterFabien Postel-Vinay Hélène Turon D I S C U S S I O N P A P E R S E R I E S ABSTRACTThe Public Pay Gap in Britain: Small Differences That (Don't?) Matter * The existing literature on inequality between private and public sectors focuses on crosssection differences in earnings levels. A more general way of looking at inequality between sectors is to recognize that forward-looking agents will care about income and job mobility too. We show that these are substantially different between the two sectors. Using data from the BHPS, we estimate a model of income and employment dynamics over seven years. We allow for unobserved heterogeneity in the propensity to be unemployed or employed in either job sector and in terms of the income process. We then combine the results into lifetime values of jobs in either sector and carry out a cross-section comparative analysis of these values. We have four main findings. First focusing on cross-sector differences in terms of the income process only, we detect a positive average public premium both in income flows and in the present discounted sum of future income flows. Second, most of the observed relative income compression in the public sector is due to a lower variance of the transitory component of income. Third, when taking job mobility into account, the lifetime public premium is essentially zero for workers that we categorize as "high-employability" individuals, suggesting that the UK labor market is sufficiently mobile to ensure a rapid allocation of workers into their "natural" sector. Fourth, we find some evidence of job queuing for public sector jobs among "low-employability" workers. JEL Classification:J45, J31, J62

Individual labor earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes. Specifically, we show within an otherwise standard job search model how the combined assumptions of on-the-job search and wage renegotiation by mutual consent act as a quantitatively plausible "internal propagation mechanism" of i.i.d. productivity shocks into persistent wage shocks. The model suggests that wage dynamics should be thought of as the outcome of a specific acceptance/rejection scheme of i.i.d. productivity shocks. This offers an alternative to the conventional linear ARMA-type approach to modelling earnings dynamics. Structural estimation of our model on a 12-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure which is remarkably consistent with the data.

Standard matching models of unemployment assume that workers and job ßows are identical. This is in stark contrast to empirical evidence that job ßows in fact only account for a fraction of worker ßows, that unemployment exits only account for a fraction of hires and that these fractions vary over the cycle. In this paper, we develop and calibrate a model based on the Mortensen and Pissarides approach but that emphasises this issue.We show that this matters -that it has very different implications for our view of unemployment dynamics.The key features of our model relate to the search options of the worker, and the job creation decision by Þrms. We allow workers to search whilst employed, and Þrms to re-advertise jobs that have been quit from. This leads us to use a different job creation process, whereby potential vacancies, or job 'ideas', arise at a Þnite rate per period over a range of idiosyncratic productivities. In the standard setting, there is an unlimited supply of potential vacancies at the top idiosyncratic productivity.The main results are as follows. First, the presence of on-the-job search has a substantial impact on labour market equilibrium, whereby equilib- * An earlier version of this paper was called "Unemployment equilibrium and on-the-job search". 1 rium unemployment is lower and exhibits a higher turnover rate. On-thejob search renders the unemployment inßow rate more sensitive to the cycle: in all cases, the inßow rate is found to be more cyclically sensitive than the outßow rate, suggesting that most unemployment dynamics occur through this channel. This conÞrms empirical results for Great Britain (Burgess and Turon (2005)). Second, our model offers some insight into a (two-way) relationship between job-to-job ßows, which drives the difference between worker and job ßows, and the extent of wage dispersion. More wage dispersion increases the incentive to search on-the-job and more on-the-job search widens the range of viable productivities and leads to lower wages at the bottom of the wage distribution, thereby increasing wage dispersion.Third, changes in the model's exogenous parameters impact unemployment to a considerable degree by changing the level of employed job search.

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