Testing Self-Selection in Transitions between the Public Sector and the Business Sector

This paper tests the Incentive Theory predictions that wages which are less sensitive to performance or skill attract lower quality workers, and wages which are more sensitive attract higher quality workers. A longitudinal dataset of individuals moving from the Israeli public sector to the Israeli business sector or vice versa, is used to test whether and to what extent relative equal-sharing discourages participation of productive individuals. The findings provide evidence of a negative selection among those switching from the business sector to the public sector, and a positive selection among those moving in the opposite direction, especially among men. Entrants to the public sector from the business sector were negatively selected in their conditional pre-entry earnings - identified as skills - compared to non-leavers. Individuals who left the public sector were positively selected by their skills compared to the workers who stayed. At the broader level, these findings provide micro level empirical support for Borjas' hypothesis that migrants' self-selection depends on the difference in earnings inequality between the origin and the destination.