No. 4/2022: Public sector wage compression and wage inequality: Gender and geographic heterogeneity

Abstract

Studies of wage inequality concentrate on private wages. Public sector wages are typically assumed to contribute to overall wage equality. We challenge this understanding in an analysis of the relative skill premium in public versus private sectors. The analysis of heterogeneity across gender and geography is based on rich register data for Norway. The raw data confirm the relative wage compression in the public sector. However, this is a male phenomenon and only prevalent in large cities when unobserved worker and firm characteristics are taken into account. With identification based on shifters between private and public sectors and movers between city-size groups, wage setting for female workers in the public sector increases wage inequality in all regions, particularly in the periphery. The result is consistent with policies promoting recruitment of high-educated female workers and expansion of public services in the periphery counterbalancing the desired equality effect of public wages.