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Public sector pay and private sector wage premiums: testing alternative models of wage determination


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  • Pramila Krishnan


The paper focuses on a labour market dominated by a public sector where the links between pay and effort are weak, as in many developing countries. This feature is incorporated in an extension of the basic Shapiro-Stiglitz model of shirking in order to explain the coexistence of high wages (in both private and public sectors) and high unemployment. Using data from panel surveys of households and of manufacturing firms, the empirical test attempts to identify why firms in the private sector do not bid down wages but offer a premium over the reservation wage of the marginal worker. The robustness of the premium is tested by controlling for the heterogeneity of workers, and the dispersion in wage offers and reservation wages of workers relative to the marginal worker. The premium appears to be driven by efficiency wage considerations rather than alternatives such as bargaining models and specific investments in workers.

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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2000-07.

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Date of creation: 2000
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Handle: RePEc:csa:wpaper:2000-07

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Keywords: Reservation wages; efficiency wages; matched employee-employer survey; panel data.;


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  1. Taye Mengistae, 1998. "Skill formation and job matching effects in wage growth: the case of manufacturing workers in Ethiopia," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 1998-19, Centre for the Study of African Economies, University of Oxford.
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Cited by:
  1. Pieter Serneels, 2004. "The Nature of Unemployment in Urban Ethiopia," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2004-01, University of Oxford, Department of Economics.


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