Public-Private Wage Differentials and Interactions Across Countries and Time

We compile a novel database on average public and private sector wages and public-private wage differentials, which we use to analyze how average public-private wage differentials vary according to gender and skill level as well as over time. We further examine the dynamic relationship between public and private wage levels and the implications for inflation. On average, public-sector workers earn around 10 percent more relative to comparable private sector workers, with the premium being higher for women, low-skilled workers, and in developing countries. The average public sector wage premium varies counter-cyclically, increasing during economic downturns, and increases prior to elections. Both private sector wages and inflation respond positively to changes in public wages, albeit with significant heterogeneity in the effects across countries reflecting differences in labor market characteristics and prevailing macroeconomic conditions.