Friday, December 4, 2015

Public sector private sector

It is a common believe among European citizens that public sector workers or civil servants are overpaid and enjoy too many privileges. In theory, one could argue that they are likely to be so, in most countries they are highly unionised and their industrial actions can produce havoc and huge disruptions on basic and essential services. Thus, through their lobby and influence they could force governments to accept higher than market wages. This is, however, just theoretically. The main problem with this theory is that in order to know if someone is overpaid or swamped with privileges, we need to know first the value of their services. How can we know the value of a service that is not traded and has no market price?

One could compare public wages to private sector wages on similar services and industries. But is that enough for a fair comparison? What other factors should one consider and how should one measure them? This is what Fabien Postel-Vinay from UCL tries to do on this paper.

What he finds is that using data for the period 1994-2003, “direct wage comparisons show that public-sector employees earn [on average] around 15% more than private-sector employees.” 

However, two adjustments need to be considered. “First, the public and private sectors differ in the jobs they offer and the type of workers they employ. Second, public- and private-sector careers also differ in other important dimensions, such as job stability and income progression, which are relevant to individual career choices”.

Any comparison of the public-private gap should take these points into account.

The first point made by Postel-Vinay is quite sensible and self-evident. We need to compare like for like and it is widely documented that the public sector tends to attract better educated and more experienced workers than the private sector. This is why the author takes from the private sector only those workers that have the experience and education similar to the average public worker.

The second bit, however, is where the study derails, the author says: “Finally, the lifetime job values used in the […] comparisons assume that workers never change sectors or experience unemployment.” A private sector with a long term zero unemployment is wishful thinking.

The graph below shows the Public-private gap in lifetime job values by percentile.

We can amend those values using unemployment rates for the period 1994 to 2014 from Eurostat and using the differences in % of workers who moved from public sector to unemployment compared to the % who moved from private sector to unemployment shown in Figure 1 of the same paper.

The results are the following: