Are public sector workers in developing countries overpaid? Evidence from a new global dataset

Abstract

This paper examines the public sector wage premium using nationally representative household surveys from up to 68 countries. Compared to all private sector paid employees, including informal sector employees, the public sector generally pays a wage premium. However, in most countries the wage premium disappears when the public sector is compared to only formal sector private employees, although there is heterogeneity across skill levels. Premiums tend to be lowest for high skilled public sector employees, who in several countries pay a penalty for working in the public sector. On the other hand, the public sector premium tends to be higher for employees with less education, those working in lower paid occupations, and those working in low skilled occupations. This pattern is consistent with wage compression in the public sector. Across countries, the wage premium is only weakly associated with countries’ level of development. These findings challenge the existing consensus that public sector workers tend to enjoy a significant wage premium over their private sector counterparts and that this premium is especially large in low income countries.