No. 2/2018: Dynamic private-public wage gap: Return to experience, education level and city effect *

Abstract

A large literature estimates the static private-public wage gap, but due to lack of data, not much is known about the dynamic gap resulting from different returns to work experience accumulated in the two sectors. This analysis applies Norwegian register data observing experience of individuals by sector. Selection on observable and unobservable worker characteristics is handled in panel models with workers fixed effects. The robustness of the results is investigated by instrumenting experience using the Altonji-Shakotko method. The dynamic experience effect adds to the static private wage premium for high-educated workers and counts for 2/3 of the total wage gap. The low educated gain less from shifting to the private sector and on average, they have no additional return to private sector experience. Both static and dynamic gains from shifting to the private sector are higher in cities, and for the low educated, the dynamic effect is a pure city phenomenon. The public sector does not add dynamic effects to the urban wage premium.