The Impact of a Government Pay Reform in Mexico on the Public Sector Wage Gap

The 2018 Federal Pay Reform on the Remuneration of Public Servants in Mexico is used to exploit its impacts on the public-private sector wage gap across the unconditional wage distribution in a developing country context. This policy uses both payment cuts and freezes for public sector workers. Using cross-sectional data from 2017 to 2019, both the mean and unconditional quantile (UQ) regression models within a Difference-in-Differences (D-i-D) framework are estimated. Stata allows the use of UQ regressions based on the Re-centred Influence Function (RIF) to centre the IF around the statistic of interest (e.g., the population mean ‘µ’, 10 E[Y]) and not zero (i.e., re-weighting the observations) for generating the RIF-quantiles. The RIF average effects are interpreted at different quantiles of the unconditional wage distribution (e.g., the 5th, 95th percentiles or other intermediate quantiles). Then, the D-i-D approach implemented through Stata provides the effects of the reform before and after the policy intervention. It also deals with the endogeneity of employment selection by taking into account the differences in the unobservable effects of the public-private employment sector selection pre-treatment and post-treatment, such unobservables are differenced out to mitigate the concerns about potential selection bias. Robustness checks are also executed with Stata, such as cohort fixed effects with pseudo panel dataset, a two-step model within a Heckman framework, the Hansen J-statistic to test orthogonality, an IV-based model, an individual-level fixed effects (FE) model with panel dataset, and a placebo in time test. Although there is some evidence that public sector employees anticipated the introduction of the policy, it reduced the public sector pay gap strongly among the lower-paid workers of the unconditional pay distribution. The UQ effects of this policy change on the public–private sectoral wage gap contribute to the limited literature for both developed and developing countries.