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Are public sector workers underpaid? - Appropriate comparators in a developing country

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  • Bales, Sarah
  • Rama, Martin

Abstract

How is public sector compensation best aligned with the market? In industrial countries a common reference is the salary paid by private employers for similar jobs (the"jobs approach"). But comparable jobs are formal, and in developing countries the relevant alternative for many public sector workers is informal sector employment. Another approach uses as a reference, the earnings of similar workers in the private sector, regardless of whether their jobs are formal, or informal (the"workers approach"). A potential shortcoming of this approach is that workers may differ in characteristics that are unobservable. The authors assess the importance of this shortcoming, by relying on five econometric methods, four of which correct the bias from unobservable characteristics. The authors focus on state-owned enterprises in Vietnam, which recruited workers on the basis of political loyalty, and other unobservable characteristics. A massive downsizing program, which led to the departure of the most entrepreneurial workers, may have exacerbated the selection bias. However, all the results obtained with the workers approach, fall within a relatively narrow range. They suggest that workers in state-owned enterprises, are overpaid by twenty percent, or more. In contrast, the jobs approach indicates that they could earn two, to six times more in the private sector.

Suggested Citation

  • Bales, Sarah & Rama, Martin, 2001. "Are public sector workers underpaid? - Appropriate comparators in a developing country," Policy Research Working Paper Series 2747, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2747
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    References listed on IDEAS

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    Cited by:

    1. Oostendorp, Remco H. & Doan, Quang Hong, 2013. "Have the returns to education really increased in Vietnam? Wage versus employment effect," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 923-938.
    2. Clément Imbert, 2011. "Decomposing wage inequality: Public and private sectors in Vietnam 1993-2006," Working Papers halshs-00564653, HAL.
    3. Clément Imbert, 2011. "Decomposing wage inequality: Public and private sectors in Vietnam 1993-2006," PSE Working Papers halshs-00564653, HAL.
    4. Disney, Richard F & Gosling, Amanda, 2003. "A New Method for Estimating Public Sector Pay Premia: Evidence from Britain in the 1990's," CEPR Discussion Papers 3787, C.E.P.R. Discussion Papers.
    5. Elena Glinskaya & Michael Lokshin, 2007. "Wage differentials between the public and private sectors in India," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(3), pages 333-355.
    6. Alejandra Mizala & Pilar Romaguera & Sebastian Gallegos, 2010. "Public-Private Wage Gap In Latin America (1999-2007): A Matching Approach," Documentos de Trabajo 268, Centro de Economía Aplicada, Universidad de Chile.

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