**Table 4: Annual Real Earnings across Employment Status in Age group 25-64 1991 to 2006 (in ‘000 cedis)**

||**1991/92**|**1998/99**|**2005/06**|**Change**|
|---|---|---|---|---|
|Wage Public sector|7,470|8,992|14,120|89.0|
|Wage Private sector Formal|6,480|8,054|9,574|47.7|
|Wage Private sector Informal|4,205|3,915|6,025|43.3|
|Self‐employed Agro|1,597|1,385|3,064|91.9|
|Self‐employed Non Agro|3,455|3,733|5,180|49.9|
|All employees|1,442|1,293|2,551|76.9|

_Source_ : Based on Coulombe and Wodon (2007), using data from the GLSS surveys. Changes are expressed in percentage points. Note: Median annual earnings expressed in local currency in 1991 prices. Some divergences in trends observed with the 1998/99 data may be due to sampling issues and/or lower level of comparability.

_What are the dynamic implications of the 25 percent average difference between public sector and private formal sector wages during the 1991‐2005 period?_ Note that this 25 percent difference reflects a 10 percent union premium plus a remaining 15 percent “real” average public sector wage premium during this period.<sup>12</sup> The first implication one would expect from this difference would be that it might place a barrier to the expansion of employment in the private formal sector, since higher public sector wages bid up private formal sector wages, which in turn squeeze private sector profits, leading as a result to lower levels of investments. Lower investments imply in turn lower increases in labor productivity and lower job creation.<sup>13</sup> The second, and related, implication one would expect from the slow growth in private formal sector employment would be to consign most of employment to the private informal sector.<sup>14</sup> These expectations are confirmed by the data available from the Ghana Living Standards Survey. The total of formal and informal employment increased more slowly than the labor force, rising by 45 percent between 1991 and 2005 (from 5.5 to 8 million people), while the labor force expanded by 55 percent, rising from 7.3 to 11.3 million people. This constraint to the growth in overall employment is likely the explanation for the very slow shift away from employment in agriculture, with the agriculture sector still employing 54 percent of the labor force in 2005, down from 56 percent in 1991.<sup>15</sup> If public sector wages were to rise more closely in line with productivity improvements in the rest of the economy, there would be more space for the private formal sector to increase employment. Increased employment in private sector urban activities would create a pull effect for rural workers into urban activities. The migration of rural workers into urban activities would lead in turn to wages for the remaining rural workers to increase in relative terms, which would have a positive impact on poverty reduction. While a full discussion of the impact of these distortions in the labor market on investment, growth, job creation and poverty reduction is beyond the scope of this paper, this brief analysis provides a glimpse of the economy‐wide impact of this persistent and widening gap between public and private formal sector wages.

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