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Private Wage Effects of a Large
Public Sector Wage Increase. The
Case of Hungary
ÁLMOS TELEGDY
Institute of Economics – HAS
Central European University
Motivation: are there public-private wage
spillovers?
• Very few studies analyzing the interaction of wages
between the private and public sectors (Jacobsen, 1991)
• Very hard to identify such effects
▫ Public and private sectors are typically composed of
diverse industries
▫ Co-movement of wages of similar workers
▫ Working hours, tasks, effort can be different
▫ Self-selection of workers across the sectors
• Without some external movement of wages, only
correlations can be established
Motivation of corporations
• Spillovers may exist if
▫ Wages are high in the public sector
▫ Workers are mobile across sectors
• Private sector employers may increase wages to prevent
workers from moving
▫ Even if workers do not move: threat effects
This study
• In September 2002 all public employees’ wages
increased
▫ Large increase (50 percent)
▫ Sudden (from one day to another)
• This external shock can help identifying the spillover
effect
▫ Get rid of the co-movement of wages
▫ Time span quite short, may assume that there are no
large changes in emploment composition (unobservable)
Wage Policies in Hungary
• Private sector
▫ Decentralized wage bargaining
▫ Mostly weak unions
• Public sector
▫ Wage grid establishing minimum wages by types of
workers
▫ Wages can deviate from the grid if the institution wants
so and has funding
Hungarian Wage Survey Data (2002-2005)
• Private sector
▫ All firms with >20 employees , a random sample of firms
with more than 5 employees
▫ Workers sampled randomly based on birth date (5th and
15th for production workers, also 25th for nonproduction)
▫ All workers in firms with <50 employees
• Public sector
▫ All employees whose employer uses a centralized book
keeping software
▫ Same sampling as in private sector for the remainder
• Data weighted to be representative
▫ Worker weights within workplace + workplace weights
Sample Selection
• Three types of public sector workers: judges, public
servants, public employees (~3/4 of public sector).
Only the last type received the wage increase.
• Full-time workers in the private sector
• Age 16-60
Sample size
Public
Corporate
Year
Unweighted
Weighted
Stat. Off.
Unweighted
Weighted
Stat. Off.
2002
377,980
571,136
554,500
123,474
2,059,193
1,880,000
2003
404,777
581,133
573,300
118,529
2,081,721
1,884,900
2004
395,341
580,572
552,500
131,840
2,222,153
1,918,900
2005
386,311
568,823
546,500
140,649
2,217,661
1,923,200
Demographic characteristics of public and
private sector workers
Public
Corporate
Female Rate
73.80
39.57
Age
42.55
39.50
Experience
23.97
22.03
Elementary
17.76
16.93
Vocational
13.57
35.68
High School
29.09
34.62
University
39.58
12.77
Education
Occupations distribution in the public and
private sectors
FEOR (ISCO)
Managers of business and budgetary institutions
Public
Private
7.3
10.59
Professionals
31.44
4.57
Technicians and associate professionals
25.16
14.97
Office and management (customer services) clerks
5.68
6.49
Services workers
7.77
10.63
Skilled agricultural and forestry workers
0.44
2.08
Craft and related trades workers
3.85
27.03
Plant and machine operators and assemblers
3.06
16.15
Elementary occupations
15.3
7.48
Earnings
• Monthly, from May
▫
▫
▫
▫
Base salary
Overtime
Regular bonuses and premia, commissions, allowances…
Extraordinary bonuses based on previous year’s records
Average earnings
Year
Public
Corporate
2002
137 926
169 457
2003
182 438
175 313
2004
184 231
176 639
2005
175 515
180 757
.5
.6
.7
.8
.9
1
Public sector wage premium
2002
2003
2004
Elementary
High school
2005
Vocational school
University
-.3
-.2
-.1
0
.1
.2
Public sector wage premium from Mincer
equation
2002
2003
2004
Elementary
High school
2005
Vocational school
University
Estimation
• Continuous treatment: take advantage of the diverse
presence of the public sector in the economy
• Segment the labor market into cells (288)
▫ education (4 categories)
▫ potential experience (5 year intervals – 8 categories)
▫ occupation (1-digit ISCO – 9 categories)
• Assume that workers are substitutes within cells, but not
across
• Variable of interest: the proportion of public sector
workers in a cell
Share of public sector in the economy
Year
Share
Std. Dev.
Min
Max
2002
0.213
0.203
0.003
0.982
2003
0.213
0.201
0.003
0.858
2004
0.202
0.195
0.003
0.783
2005
0.200
0.196
0.001
0.735
Estimation equation
Use corporate sector employment
Mincer equation, augmented by public share:
lnwij = α0 + α1PUBLICj + Σα2kEDUCki + α3Expi + α4Expi 2 +
Σα5lOCCli + α6FEMALEi +Σα7mCOUNTYmi + Σα8tYEARt + εi
.1
.2
.3
.4
.5
Public private wage spillovers
2002
2003
2004
2005
Estimation by subgroups
• Some groups are more likely to be affected by the wage
increase
▫ High proportion of females in the public sector
▫ Young workers more mobile
.25
.3
.35
.4
.45
Spillovers by gender
2002
2003
2004
Male
2005
Female
.2
.3
.4
.5
.6
Spillovers by age
2002
2003
2004
Workers over 35
2005
Workers under 35
Other wage effects
• Large minimum wage increase: 100 percent in 19992001. If this affected the two sectors differently, it may
bias the results.
▫ Do the estimations separately for educational groups
0
.1
.2
.3
.4
.5
Spillovers by education
2002
2003
2004
Elementary
High school
2005
Vocational school
University
Conclusions
• Identification of public wage spillovers from an external
shock
• Wages increase for workers who are more exposed to
the public sector