Changes in Public and Private Sector Pay Structures in Two Emerging Market Economies during the Crisis

This paper estimates public-private sector wage differentials in two emerging market economies - Croatia and Serbia - between 2008 and 2011 in order to understand changes in the gap resulting from austerity measures undertaken by each sector. The paper focuses on counterfactual decompositions of the wage gap at the mean and at selected quantiles along the wage distribution, performed using an extension to the Oaxaca-Blinder method based on Recentered Influence Function (RIF) regressions and reweighting. The main results indicate that there was a wage premium in the public sector for both countries and in both years. Although the total wage gap decreased in Serbia during the crisis, the wage structure effect, or the returns to workers’ characteristics, increased in both countries. The paper shows that the private sector in both countries adjusted wages relative to the public sector more at the bottom than at the top of the wage distribution, which led to an increase in the relative public sector wage compression, especially in Croatia. While in Croatia the wage gaps stemming from differences between the public and private sector in the returns to characteristics for similar workers were within the range usually estimated for EU countries, these gaps were considerably higher in the case of Serbia.