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The Public Pay Gap in Britain: Small Differences That (Don’t?) Matter

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Author Info
Postel-Vinay, Fabien
Turon, Hélène

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Abstract

The existing literature on inequality between private and public sectors focuses on cross-section differences in earnings levels. A more general way of looking at inequality between sectors is to recognize that forward-looking agents will care about income and job mobility too. We show that these are substantially different between the two sectors. Using data from the BHPS, we estimate a model of income and employment dynamics over seven years. We allow for unobserved heterogeneity in the propensity to be unemployed or employed in either job sector and in terms of the income process. We then combine the results into lifetime values of jobs in either sector and carry out a cross-section comparative analysis of these values. We have four main findings. First focusing on cross-sector differences in terms of the income process only, we detect a positive average public premium both in income flows and in the present discounted sum of future income flows. Second, we argue that income inequality is lower but more persistent in the public sector, as most of the observed relative cross-sectional income compression in the public sector is due to a lower variance of the transitory component of income. Third, when taking job mobility into account, the lifetime public premium is essentially zero for workers that we categorize as "high-employability" individuals, suggesting that the UK labor market is sufficiently mobile to ensure a rapid allocation of workers into their "natural" sector. Fourth, we find some evidence of job queuing for public sector jobs among "low-employability" workers.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5296.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5296

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Related research
Keywords: income dynamics job mobility public-private inequality selection effects

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Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
J62 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Job, Occupational and Intergenerational Mobility; Promotion

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bargain, Olivier & Melly, Blaise, 2008. "Public Sector Pay Gap in France: New Evidence Using Panel Data," IZA Discussion Papers 3427, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Monojit Chatterji & Karen Mumford & Peter N. Smith, 2007. "The Public-Private Sector Gender Wage Differential: Evidence from Matched Employee-Workplace Data," IZA Discussion Papers 3158, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Gian Luigi Albano & Clare Leaver, 2005. "Transparency, Recuitment and Retention in the Public Sector," The Centre for Market and Public Organisation 05/132, Department of Economics, University of Bristol, UK. [Downloadable!]
  4. Azmat, Ghazala & Manning, Alan & Van Reenen, John, 2007. "Privatization, Entry Regulation and the Decline of Labour's Share of GDP: A Cross-Country Analysis of the Network Industries," CEPR Discussion Papers 6348, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Richard Disney & Amanda Gosling, 2008. "Changing public sector wage differentials in the UK," IFS Working Papers W08/02, Institute for Fiscal Studies. [Downloadable!]
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