The Public-Private Sector Wage Gap in Lithuania: Evidence from Social Security Data

This paper estimates high-dimensional fixed effects models using detailed administrative data to characterize the public-private wage gap in Lithuania between 2010 and 2020. We document that public sector employees earn on average 10% more than their private sector counterparts. However, when comparing firm-specific wage effects, the gap almost disappears, with public sector employers paying a 0.3% lower premium. Interestingly, women benefit from working in the public sector, as they have a 16% premium due to both being employed by organizations with higher premiums and having higher returns to individual-specific components relative to women in private firms. In contrast, men have higher returns to unobserved permanent heterogeneity, which are particularly high for public sector workers, but they are with employers that have lower premiums relative to men in the private sector, resulting in an observed public sector premium of 4%. Our results highlight the importance of using mobility across firms, not just across sectors, and of isolating firm-specific wage components from other sources of wage variation to properly understand pay differentials across employers with different wage-setting protocols.