Across the world, the public sector pays higher average wages than the private sector for similar employees. Using data from Albania and Sri Lanka, the Growth Lab’s Ricardo Hausmann, Ljubica Nedelkoska, and Sehar Noor examined the factors behind public sector wage premiums. They found that in both countries, the government sector pays a premium for all, but its most skilled employees. For this group, the private sector pays better. Moreover, the government sector offers pensions, permanent contracts, and fringe benefits to the majority of its employees, as opposed to the private sector, where these are mainly reserved for the most valued employees. They show that the payment schemes of the public sector are primarily based on qualifications, where private sector wages are additionally influenced by person-specific characteristics, presumably negotiation skills and productivity. The research also shows that among the most valued employees (i.e., the highly skilled and highly paid ones), the best ones opt for the private sector. The best employees among the less skilled ones, opt for the government sector.
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