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The Strange Case of the Public Sector Wage Premium

PFM, Vol. 2 No. 3, (2002)

Empirical work suggests the presence of a public sector wage
premium. This paper investigates the theoretical reasons for the presence
of such a premium. The results of the paper are consistent with the
higher premium paid to women and with the fact that the premium
decreases with skills. The key insight of the paper is that job security
undermines the incentive to work hard and forces the public sector to pay
higher wages. One implication of the paper is that the public sector wage
premium can be used as an indicator of inefficiency of the public sector.

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