Examining Equality between Public- and Private-Sector Wage Distributions

I. INTRODUCTION Institutional, political, and economic factors all contribute to the determination of public-sector wages. For example, the public sector is almost the only place in many advanced economies where unions continue to have a significant presence and an influential voice in setting wages and conditions of work. Political factors, such as desiring to be a good employer, may also influence the public-sector wage structure. As a good employer, governments may offer low-skilled workers higher rates of pay than they might get in the private sector. On the other hand, the public sector may be adverse to paying very skilled workers high rates of pay if the public does not like to see public-sector workers earning too much. Economic factors, such as spending and tax receipt limits, can also affect the wage structure in the public sector. All of these factors could make the public-sector labor market be less efficient than that of the private sector. From an economic perspective, if government workers are paid more than private-sector workers, ceteris paribus, then taxes are being wasted. If private-sector workers are paid more than government workers, governments cannot recruit and retain appropriately skilled and productive workers. To make the wage structures comparable, many countries use surveys to ascertain the prevailing earnings levels for jobs in the private sector that are similar to public-sector jobs. However as Fogel and Lewin (1974) and Gregory (1990) point out, these survey methods are fraught with biases that may affect comparability of wages. Indeed, there is little empirical evidence that wages between the two sectors are equal. Bender (1998) and Gregory and Borland (1999) survey the current literature on public-private wage differentials and report that most studies find that central governments pay more on average compared to the private sector, even after controlling for differences in the productive characteristics of workers. Furthermore, as Elliott et al. (1999) find, comparability in pay is currently important in the debates over public-sector pay reform, particularly in Europe. The institutional and political factors outlined above are waning in importance, and economic considerations are seemingly coming to the fore. Because of perceptions of the overpayment of public-sector workers and the desire to cut government wage bills, politicians in these countries are devising policies to align average rates of pay by slowing the relative rate of public-sector wage growth. The policies should be different, however, if wage distributions are not the same. Indeed, there is some evidence that the distributions differ, as found in the double imbalance concept articulated by Schager (1993), Katz and Krueger (1993), and Elliott and Duffus (1996). This imbalance is characterized by public-sector workers at the lower end of the occupational hierarchy receiving the largest wage premia and workers at the upper end earning less than their private-sector counterparts. If the distributions are incomparable, ceteris paribus, mandating equal average rates of pay growth will not ensure comparability. Policies aimed at realigning wage structures at the ends of the distribution should then be followed to promote comparability. This article compares public- and private-sector wage distributions and examines the extent to which focusing exclusively on differences in mean wages obscures the true nature of the wage relativities. Data from the British Social Change and Economic Life Initiative (SCELI) are employed to investigate comparability. This data set is well suited for a comparability study given the range of personal and job characteristics that control for differences in public-and private-sector jobs. Moreover, the data were collected in 1986, before substantial reform of public-sector pay in the United Kingdom, reviewed in Bender and Elliott (1999). This offers a test to see if the reform policies were appropriate to promote wage comparability. …