Hand turns dice and changes the expression "public sector" to "private sector".
VoxEU Column Labour Markets

Dissecting the public-private wage gap: Evidence from Spain

Public and private sector wages differ in most countries around the world. Multiple explanations can account for this, including differences in workers’ preferences, union strength, and recruitment rules. This column studies the dynamics of public sector pay in Spain up to 2018. It finds evidence of a positive wage gap in favour of the public sector which is not explained by differences in productivity or selection. Furthermore, there is evidence of strong wage compression along the skill distribution and a wage premium for less-skilled female employees. These findings can be rationalised using a monopsonistic wage-setting model in the presence of female statistical discrimination.

Why do wages differ in the public and private sectors? A useful starting point to address this question is to acknowledge that jobs in these two sectors differ in both the nature of the performed tasks (since the public sector is the only provider of certain goods and services) and their working conditions (Garibaldi and Gomes 2020). Accordingly, wages in both sectors may diverge for multiple reasons, among which differences in workers´ socioeconomic characteristics and preferences, recruitment rules, non-competitive wage setting, employers´ objectives, and union strength stand out.

For example, two stylised facts in most developed countries are the greater compression of public-sector wages across levels of education (typically less-skilled public employees´ pay is higher than in the private sector, while the opposite holds among high-skilled employees), and the existence of different wage gaps by gender (Winten-Ebmer et al. 2007).

Stylised facts

Spain is no exception to these empirical regularities, as documented by Hospido and Moral-Benito (2016). However, their study focuses on the 2000-2012 period which precedes the end of the sovereign debt crisis and the subsequent recovery of the Spanish economy after 2014. In a recent paper (Couceiro de León and Dolado 2023), we extend this evidence up to 2018 before the arrival of the pandemic.

In line with other countries, the first relevant feature is the overrepresentation of women in the Spanish public sector: 55% of public employees are females against 41% in the private sector. This is possibly due to self-selection of women willing to reconcile work and family. Another salient difference is the greater fraction of high-skilled individuals in the public sector (30% have a college or even higher degree versus 17% in the private sector), which also translates into a higher weight of upper occupations: 42% versus 32%. Garibaldi et al. (2021) argue that public employment is skewed towards high-skilled labour because governments seeking to get better inputs for the production of public goods and services use this type of labour since it is relatively less costly when public wages are compressed along the skills distribution. Further differences are related to age and job tenure: on average 34% of public sector employees are above 50 years of age versus 20% in the private sector, while tenure is about five years longer. Both figures point to a much higher job stability in the public sector which may lead to a greater proportion of women enjoying maternity leaves in that sector (despite being older on average). As regards labour contract types, temporary contracts are more prominent in the public sector (31.7% versus 18.6%) while the opposite holds for part-time work (9.0% versus 17%). Note that fixed-term contracts are concentrated in provincial and town councils which use interim hiring intensively in education and health due to fiscal adjustments since the Great Recession. At any rate, outflows to unemployment and inactivity are much lower in the public than in the private sector (Fontaine et al. 2020).

Findings

The questions we address are whether the recovery phase since 2014 and the effects of the labour market reforms implemented in 2010 and 2012 have brought relevant changes in the regularities uncovered during the previous decade. Using detailed microdata from three waves of the Wage Structure Survey (EES, 2010, 2014, 2018), our main findings appear in Table 1. Unexplained hourly wage gaps obtained from Oaxaca-Blinder decompositions applied to the estimated mincerian wage equations considered in the paper are reported, once a wide array of demographics and selection correction terms (identified by maternity and paternity leaves) are controlled for.

Table 1 Public-private wage gap (whole sample and subsamples)

Table 1 Public-private wage gap

Notes: The reported wage gaps are the sum of the unexplained and selectivity components in the Oaxaca Blinder decompositions of mincerian wage equations, as explained in Couceiro de León and Dolado (2023).

The main results can be summarised as follows. We find:

  1. a raw wage gap of 20 points and an unexplained wage gap of about six points on average in favour of the public sector which is not explained by differences in productivity or selection;
  2.  that public sector premium is fairly acyclical, despite the procyclicality of the raw gap (from 15 points in 2015 to 23 points in 2018);
  3. strong wage compression, with a positive (negative) gap for public employees with less (higher) qualifications, which may explain the difficulty of the public sector to attract and retain its most-qualified workers (Campos and Centeno 2012); and
  4. a wage premium for less-skilled female public employees which is the only group favourably self-selected into that sector.

In general, these findings are qualitatively similar to those reported in the literature but there is some divergence in quantitative terms due to the specificities of the Spanish labour market on which we try to shed light through some theoretical interpretations.

Interpretation

Our rationalisation of the above-mentioned empirical findings relies on a combination of the following mechanisms. First, the opposite sign of the wage gap by education can be explained by the public sector acting as a bilateral monopsonist in several economic activities where it faces upward sloping labour supplies of its labour inputs. Since a common finding in the literature is that the elasticity of labour supply for less-skilled workers is higher than for high-skilled workers (Borjas 2002), monopsonistic power implies that, vis-á-vis a competitive equilibrium, the public sector reduces the wages of those workers with more inelastic labour supplies relative to those with higher elasticities.

Second, the other leg of the bilateral monopsony is the presence of much stronger trade unions in the public than in the private sector, whose goal is to compress the wage distribution because the median voter in unions´ elections is typically a public employee with a low or medium qualification levels.

Finally, to explain the different results by gender, our evidence points to fertile women being subject to statistical discrimination in the private sector due to their greater job instability, while stricter regulations in the public sector prevent this type of actions (De la Rica et al. 2007, Valfort et al. 2020). This is particularly the case of less-skilled women who self-select into the public sector where, in addition, they get higher on-the-job training and therefore end up receiving better pay (Dolado et al. 2013). We provide evidence about this statistical discrimination in the private sector by showing that women with longer tenures experience much lower or no wage penalties at all as employers should be able to learn much faster about the true productivity of more stable workers because this learning would be in their benefit (Altonji and Pierret 2001).

Discussion

Note that the existence of a positive public-private wage gap goes against the theory of compensating differentials which predicts that, ceteris paribus, jobs with higher risk or fewer comforts in the private sector should be compensated with higher pay. The evidence provided here shows that both the type of wage setting regulation ruling among public employees and the lack of statistical discrimination against less-skilled women lead to a public wage premium despite the increasing incidence of temporary jobs in the public sector.

References

Altonji, J G and C R Pierret (2001), “Employer learning and statistical discrimination”, The Quarterly Journal of Economics 116: 313–350.

Borjas, G J (2002), "The wage structure and the sorting of workers into the public sector", NBER Working Paper No. 9313.

Campos, M M and M Centeno (2012), "Public-private wage gaps in the period prior to the adoption of the Euro: An application based on longitudinal data", Banco de Portugal WP 1, Economics and Research Department.

Couceiro de León, A and J Dolado (2023), “Revisiting the public-private wage gap in Spain: New evidence and interpretation”, CEPR Discussion Paper 18136, (forthcoming in SERIEs, The Journal of the Spanish Economic Association, Special Issue in Honour of Manuel Arellano).

De la Rica, S, J J Dolado and V Llorens (2007), “Ceilings or floors? Gender wage gaps by education in Spain”, Journal of Population Economics 21(3): 751–776.

Dolado, J, C García-Peñalosa and S De la Rica (2013), “On gender gaps and self-fulfilling expectations: An alternative approach based on paid-for-training”, Economic Inquiry 51: 1829-48.

Fontaine, I, I Galvez-Iniesta, P Gomes and D Vila-Martin (2020), “Labour market flows: Accounting for the public sector”, Labour Economics 62, 101770.

Garibaldi, P and P Gomes (2020), "The economics of public employment: An overview for policy makers", XXII European Conference, Fondazione Rodolfo Debenedetti.

Garibaldi, P, P Gomes and T Sopreseuth (2021), "Public employment redux”, Journal of Government and Economics 1, 100003.

Hospido, L and E Moral-Benito (2016), "The public sector wage premium in Spain: Evidence from longitudinal administrative data", Labour Economics 42: 101-122.

Valfort, M A, S Carcillo, A Minea and P Cahuc (2020), “When correspondence studies fail to detect hiring discrimination: Evidence from the French public and private sectors”, VoxEU.org, 3 January.

Winter-Ebmer, R, M Zweimüller and D Weichselbaumer (2007), “What are the reasons for international gender wage gaps”, VoxEU.org, 21 August.

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