Wednesday, December 28, 2011

28/12/2011: ECB: New evidence on public-private pay gap: part 1

ECB Working Paper 1406 (December 2011) titled "The Public Sector Pay Gap in a Selection of Euro Area Countries" looks at the relationship between public and private sector wages over recent decades in the light of "the increase in public sector employment in many countries, with relevant implications for the overall macroeconomic performance and for public finances". The study considered ten euro area countries: Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain.

Per authors: "According to national account aggregate data, the wage earned by a representative public sector employee is higher than the one earned by a representative private sector employee in all the countries of this study, except Belgium, France and Germany. In particular, in the period 1995-2009 the ratio of public to private compensation per employee is found to be consistently below one in the case of France, slightly below one in the cases of Germany and Belgium, around 1.1 for Austria, around 1.2-1.3 for Italy, Spain, Greece, Ireland and Slovenia, and above 1.5 for Portugal."

"Available data on union membership – referring to the period 1997-2009 depending on the country - show that union density (measured by the ratio between reported membership and employed dependent labour force) is typically much higher in the public than in the private sector (in the European countries approximately twice as much). Among the countries included in this study, union density rates are relatively high in Belgium (around 50%), followed by Austria, Ireland, Italy and Portugal (in the 30- 40% range) and Germany (27%); it is relatively low in France (about 8%) and Spain (16%)."

The summary of the premium evolution is provided here:
In the chart above, Ireland has the second highest gap after Portugal.

The paper provides a reminder of a number of studies that have examined the public-private sector wage gap in Ireland:
  • Boyle at. al. (2004) report wage premia for public sector workers, greater for low-paid workers and smaller for public sector workers at the top of the earnings distribution using microdata from the European Community Household Panel Survey. 
  • Foley and O’Callaghan (2009), using micro data from the 2007 National Employment Survey, also find a sizable public sector wage premium, highest at the lower ends of the earnings distribution. The authors use a variety of estimation techniques and control for work place and employee characteristics such as age, education, gender, occupation, etc. However, the authors urge caution in reaching a definitive conclusions on the average public sector premium. 
  • Kelly et. al. (2009), using data from the 2003 and 2006 National Employment Surveys, analise the public- private sector wage gap in Ireland. Their results indicate that the public sector pay premium increased considerably from 14 to 26 per cent between 2003 and 2006. Moreover, they also reported that there was significant variation across public service sub-sectors.

The ECB research provides controls for a number of variables that can theoretically explain diferences in pay between public and private sector, such as education as skills proxy and gender,  earnings groupings by percentiles,  and firm size. All are found to retain statistically signifcant public sector earnings premium in the case of Ireland. 

The study also looks at one specific category - Education. "On average workers in “Education” earn much higher wages with respect to workers with similar characteristics in the private sector relative to workers in the other sub-sectors, while workers in the “Health” sector are less at advantage, and as in the case of Germany even at disadvantage with respect to their private sector counterparts. This finding is confirmed on the basis of a formal statistical test..."

And the premium holds when controlling for workers' own education:

So overall, the study finds that: "A large body of literature has analysed the issue using micro-data on single countries. Most of these studies find a differential in favour of public sector workers, even after taking into account some observable individual characteristics. As in the previous studies, our results, referring to the period 2004-2007, point to a conditional pay differential in favour of the public sector that is generally higher for women, for workers at the bottom of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. We also find notable differences across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. The differential generally decreases when considering monthly wages as opposed to hourly wages and if we restrict our comparison to large private firms."

There goes one of those "We are not Greece" comparatives that the Irish Government is so keen on. When it comes to pay premium in the public sector, we are in the Club Med (PIIGS) group after all.

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