(Why) Is There a Public/Private Pay Gap?

Abstract

The government is facing a severe shortage of skilled workers. The conventional wisdom in branches of policy and public administration is that the shortage is driven by low salaries that are not competitive for attracting top talent. Using longitudinal data on high skilled workers between 1993 and 2013, this paper shows that, if anything, government employees earn more than their private sector counterparts. Although government workers tend to earn less in the raw data, these differences are driven by the correlation between unobserved productivity and selection into private sector jobs. Instead, this paper provides empirical evidence that low non-pecuniary amenities, such as development opportunities and management, can explain earnings differences between the public and private sectors.

Keywords: careers, development and training, earnings, management, public-private pay gap

JEL Classification: H11, J31, J32, J38, M54