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

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  • Fabien Postel-Vinay

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, CEPR - Center for Economic Policy Research - CEPR, IZA - Institute for the Study of Labor - IZA)

  • Hélène Turon

    (IZA - Institute for the Study of Labor - IZA, Departement of Economics - University of Bristol - University of Bristol)

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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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00590765.

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Date of creation: May 2005
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Handle: RePEc:hal:psewpa:halshs-00590765

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

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References

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