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

  • Bales, Sarah
  • Rama, Martin

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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2747.

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Date of creation: 31 Dec 2001
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Handle: RePEc:wbk:wbrwps:2747
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  1. MartÌn Rama, 2002. "The Gender Implications of Public Sector Downsizing: The Reform Program of Vietnam," World Bank Research Observer, World Bank Group, vol. 17(2), pages 167-189, September.
  2. Rama, Martin & MacIsaac, Donna, 1999. "Earnings and Welfare after Downsizing: Central Bank Employees in Ecuador," World Bank Economic Review, World Bank Group, vol. 13(1), pages 89-116, January.
  3. Margaret E. Grosh & Paul Glewwe, 1998. "Data Watch: The World Bank's Living Standards Measurement Study Household Surveys," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 187-196, Winter.
  4. Taye Mengistae, 1998. "Wage rates and job queues: does the public sector overpay in Ethiopia?," Economics Series Working Papers WPS/1998-20, University of Oxford, Department of Economics.
  5. Rama, Martin, 1999. "Public Sector Downsizing: An Introduction," World Bank Economic Review, World Bank Group, vol. 13(1), pages 1-22, January.
  6. Psacharopoulos, George & Valenzuela, Jorge & Arends, Mary, 1996. "Teacher salaries in Latin America: A review," Economics of Education Review, Elsevier, vol. 15(4), pages 401-406, October.
  7. Adamchik, Vera A. & Bedi, Arjun S., 2000. "Wage differentials between the public and the private sectors: evidence from an economy in transition," Labour Economics, Elsevier, vol. 7(2), pages 203-224, March.
  8. Hou, Jack W., 1993. "Public-private wage comparison: A case study of Taiwan," Journal of Asian Economics, Elsevier, vol. 4(2), pages 347-362.
  9. Terrell, Katherine, 1993. "Public-private wage differentials in Haiti Do public servants earn a rent?," Journal of Development Economics, Elsevier, vol. 42(2), pages 293-314, December.
  10. Lindauer, David L. & Sabot, Richard H., 1983. "The public/private wage differential in a poor urban economy," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 137-152.
  11. Haltiwanger, John & Singh, Manisha, 1999. "Cross-Country Evidence on Public Sector Retrenchment," World Bank Economic Review, World Bank Group, vol. 13(1), pages 23-66, January.
  12. Deon Filmer & David Lindauer, 2001. "Does Indonesia Have A 'Low Pay' Civil Service?," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 37(2), pages 189-205.
  13. Belser, Patrick & Rama, Martin, 2001. "State ownership and labor redundancy - estimates based on enterprise-level data from Vietnam," Policy Research Working Paper Series 2599, The World Bank.
  14. Assaad, Ragui, 1999. "Matching Severance Payments with Worker Losses in the Egyptian Public Sector," World Bank Economic Review, World Bank Group, vol. 13(1), pages 117-53, January.
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