group could also underestimate the wage premium. This is because the public sector wage premium appears to be smallest for the types of workers overrepresented in formal employment, such as better educated workers. Further analysis, based on richer panel data containing information on worker characteristics, skills, and work transitions, is needed to better assess the relative magnitude of these biases and evaluate whether excluding informal sector workers from the control group improves or worsens the accuracy of the estimated wage premia.

Where public sector workers come from, and where they go if they leave, could shed light on the appropriate private sector comparator. A few studies have used panel data to examine transitions between public and private sector jobs, such as tracer studies of separated public sector workers. These studies suggest that for many workers, particularly unskilled workers, the relevant alternative employment includes informal self‐employment and informal sector salaried employment, while the appropriate comparison for skilled workers may be the private formal sector or (formal) self‐employed professionals (Alderman et al., 1996, Rama and MacIsaac, 1999, Girsberger and Meango, 2017, Yassin and Langot, 2017). Girsberger and Meango (2017) present data on transitions between the public, private formal and private informal sectors from West Africa. Most less‐educated workers who leave jobs in the public sector go to the informal sector, and once in the informal sector very few transition into a private formal sector job or back to the public sector. On the other hand, more‐educated public sector workers who leave the public sector tend to go to self‐employment or formal salaried employment. For all workers, the biggest source of transitions into the public sector is from unemployment. Yassin and Langot (2017), which presents transition probabilities for Egypt, also find that most workers who enter the public sector come from unemployment. For workers with a tertiary education, a significant proportion of public sector workers also come from formal self‐employment, most likely as professionals. For more educated workers public sector employment is very stable— over 98% of those with a tertiary education in the public sector were in the public sector 3 years before. On the other hand, there is much less stability in the public sector for less educated workers.

In summary, the transition data from developing countries suggest that since less‐skilled public sector employees who leave the public sector tend to go to the informal sector, their appropriate comparison includes informal sector employment. On the other hand, since workers with a tertiary education do not tend to move into the informal sector when they lose their jobs, but often move back and forth between the private formal sector and the public sector, the appropriate comparison for them is the private formal sector. In the discussion below we focus on developing countries and present evidence for both comparators (all private employees and only private formal employees).

These patterns of public sector employment transitions also suggest that the estimates of public sector earnings differentials should differentiate between less‐skilled and more‐skilled workers. When we estimate earnings differentials by education level and compare to private formal employees, we find that the relationship between education level and the public sector earnings premium is not monotonic. The average premium across countries is 7.8 percent for employees with a primary education, 11.6 percent for employees with a secondary education, while employees with a post‐ secondary education pay an average penalty of 3.4 percent. Figure 9 shows that for most countries, public earnings premiums are higher for employees with secondary education than for workers with post‐secondary education. Compared to private formal sector workers, secondary school graduates working in the public sector earn statistically significant premiums in 54 percent of countries (and penalties in only 10 percent), while employees with post‐secondary education earn statistically significant premiums in only 24 percent of countries. In most countries (56 percent) the earnings for 13