WHAT HAS 20 YEARS OF PUBLIC–PRIVATE PAY GAP LITERATURE TOLD US? EASTERN EUROPEAN TRANSITIONING vs. DEVELOPED ECONOMIES

Abstract

This paper surveys the literature on public-private sector pay differentials based on 20 years of research in transitioning countries of Eastern Europe (EE) and compares the results with estimates obtained from developed market economies. The majority of empirical studies from EE economies found evidence of public sector pay penalties during the period of economic transition from a communist to market-based economy. In developed economies, however, the average differential is usually around zero or positive. The public sector pay inequality reducing effect relative to the private sector is greater in transitioning economies than in developed economies. Nevertheless, there is evidence that the sign of the public sector pay gap as well as the relative public sector pay distribution change with the progress of economic transition towards those usually observed in developed economies. Different pay-setting arrangements between private and public sectors and competition for workers seem to be major arguments for the existence of systematic pay differences between the two sectors.

Wage policies in the public sector during wholesale privatization

“…The author also thanks Richard Disney and Iva Tomić. The author draws heavily on previous work [1], [4], [5], [11], [12].…”

“…In other words, workers with high wages are more underpaid than those with low wages when both are compared with their private sector counterparts. Whilst public sector wage compression is also typical for developed countries, a comprehensive literature survey suggests greater compression in transition economies [5]. Consequently, higher paid workers had greater incentives than lower paid workers to search for better opportunities in the private sector.…”

“…Given that wholesale privatization implies ownership change even though most people do not actually change jobs, procedures that explore changes in the proportions among industry branches in the public sector caused mainly by privatization could correct for potential endogeneity of job moves [4]. Furthermore, analyses of cross-country comparisons of long-term trends in sectoral wage gaps during transition are hampered by data limitations, changes in survey methodology, sector definitions, and sample and variable selection [5].…”

“…Apart from employee self-selection, evidence on other selection issues and measurement errors on reported sector status is lacking. For example, it may be the case that better performing firms are the first to be privatized and/or that workers are confused over employers' ownership due to the speed of privatization [5]. Given that wholesale privatization implies ownership change even though most people do not actually change jobs, procedures that explore changes in the proportions among industry branches in the public sector caused mainly by privatization could correct for potential endogeneity of job moves [4].…”

“…This result is robust across different methodological approaches, definitions of public sector, wage definitions (monthly, hourly, before or after tax), gender, and data sources (whether self-reported or employer-provided). In most countries the negative gap between public and private sector wages narrows over time [5].…”