Ž .
Labour Economics 7 2000 203–224 www.elsevier.nlrlocatereconbase
Wage differentials between the public and the private sectors: evidence from an economy in
transition
Vera A. Adamchik
a
, Arjun S. Bedi
b,
a
Lehigh UniÕersity, Bethlehem, PA, USA
b
Institute of Social Studies, Kortenaerkade 12, 2518 AX The Hague, The Netherlands Received 5 November 1998; accepted 24 June 1999
Abstract
This paper uses data from Poland to examine whether there are any wage differentials between workers in the public and the private sectors. After standardising for worker
characteristics and sector selection effects, we find a private sector wage advantage. The wage premium is particularly pronounced for University-educated workers. Our results
suggest that these wage differentials will make it difficult for the public sector to attract and retain skilled employees. In addition, lower public sector wages may encourage moonlight-
ing and compromise the efficiency of the public sector. q 2000 Elsevier Science B.V. All rights reserved.
JEL classification: J310 Keywords: Transition economies; Wage differentials
1. Introduction
Prior to the 1990s, the presence of the private sector in Poland was limited. Almost all non-agricultural employment was in the public sector and wages were
Corresponding author. Tel.: q31-70-4260460; fax: q31-70-4260799 0927-5371r00r - see front matter q 2000 Elsevier Science B.V. All rights reserved.
Ž .
PII: S 0 9 2 7 - 5 3 7 1 9 9 0 0 0 3 0 - 5
determined by the government. The government tried to set wages taking into account marginal productivity, compensating wage differentials, social factors, and
other considerations such as effort. However, even the first criterion itself was difficult to implement as distorted prices made it hard to measure productivity.
Consequently, despite government effort, wages bore almost no relation to differ-
Ž .
ences in productivity or skill see Jackman and Rutkowski, 1994 . In recent years, the economic transition in Poland has resulted in sharp changes
in the wage structure. The rapid emergence and spread of the private sector, with its accent on productivity, has been charged as the primary force shaping these
Ž .
changes. Rutkowski 1996 displays that there has been a complete reversal of the pre-transition wage structure and reports increasing returns to education, higher
private sector educational returns, higher private sector wages, and an increase in wage inequality.
Changes in the wage structure and wage differentials between the public and the private sectors may have significant consequences. Changing economic posi-
tions of different groups and increasing wage differences may cause resentment, political disillusionment, and threaten or slow down the process of reform.
1
Increasing wage differentials may also make it difficult for the public sector to Ž
. retain and attract workers Katz and Krueger, 1991 . Alternatively, even if there
are no recruitment problems, lower public sector wages may increase the incidence of moonlighting and adversely affect public sector efficiency. Furthermore, higher
private sector wages might have spillover effects on the public sector with negative consequences on its fiscal position. Thus, the pertinent questions that
need to be addressed are whether there are any wage differentials between the private and the public sectors and what are the implications of these differences.
The issue of sectoral wage differentials has been intensively explored for Ž
developed countries for recent work see Rees and Shah, 1995 and Dustmann and .
Ž van Soest, 1998 . However, fewer studies exist for developing countries for a
. survey see Van der Gaag et al., 1989 and for obvious reasons, work on Central
and Eastern European countries is especially scanty. Existing evidence on Ž
. private–public wage differentials in Poland is provided by Rutkowski 1996 and
Ž .
Coricelli et al. 1995 . Nevertheless, these studies should be viewed with caution as the results are based on examining average wages without controlling for
workers’ characteristics. A further shortcoming of most existing research is that analysis of wage differentials is conducted after estimating sector specific wage
equations.
2
This approach ignores the choice aspect of belonging to a particular sector and may lead to biased estimates.
1
For instance, doctors in Warsaw were on strike for several months in 1997. Among other changes, Ž
w x.
their demands included an increase in pay packages Sluzba Zdrowia Health Care , 6–10 February .
1997 .
2
Ž The more recent literature addresses this problem by estimating switching regression models for,
. e.g., Dustmann and van Soest, 1998 .
In this paper, we use recently collected labour market data from Poland to estimate public–private sector earnings differentials. To tackle the selection issue,
we rely on a switching regression model. In addition to econometric refinement, the results presented in this paper are interesting for a variety of reasons. First, our
study is one of the few to explore such issues in the context of an economy undergoing transition. Second, the estimated wage gap, if any, provides an
indication of the wages that the public sector needs to pay in order to keep up. This in turn provides an idea of the recruitment, retention and moonlighting
problems that the public sector may face due to increasing wage differentials. The outline of the paper is as follows: Section 2 provides information on the Polish
context, Section 3 discusses the analytical framework. Section 4 contains a discussion of the data and estimates. Section 5 summarises and concludes.
2. The evolution of the private sector
