This work attempts to find evidence on the extent of the rent paid to sector workers in the United States by comparing human returns between the public and private sector, controlling for selectivity bias. Using information from the Health and Retirement Study (HRS) and the Current Population Survey (CPS) for the period 1992-2000, | apply propensity score matching methods in order to obtain workers from both sectors comparable in terms of their propensity score or conditional probability of working in the public sector. Results show a wage premium paid to public sector workers ranging from 3.5 percent to 11.1 percent when controlling for union status, and from 21.6 percent to 6 percent without controlling for union status. Wage differentials widen when adjusted for nonwage pecuniary benefits, with public sector workers enjoying relatively better jobs. In the presence of selectivity bias, the wage premium seems to be underestimated. Josefa Ramoni-Perazzi Josefa Ramoni-Perazzi, Ph.D: received a Master degree in Statistics from the University of The Andes (Mérida, Venezuela) in 1998 and a Ph.D. in Economics from the University of South Florida (USA) in 2004. Currently, she is a Professor at the University of The Andes in the area of quantitative methods. _ 978-3-639-02346-6Josefa Ramoni-Perazzi Compensation Comparisons between Sectors in US A Propensity Score Matching Approach VDM Verlag Dr. MillerImprint legislation and could thus be used by anyone. 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KG, Dudweiler Landstr. 125 2 66123 Saarbricken, Telefon +49 681 9100-696, Telefax +49 681 9100-988, Email info@vdm-verag.de Zug: Tampa, University of South Flexi, 2004 Herstllung in Deutschland ‘Schaltungsdienst Lange 0.H.G, Zehrensdorter Str. 11, 0-12277 Bedin Books on Demand GmbH, Gutenbergring 53, D-22843 Norderstedt Reha GmbH, Dudwelerstrasse 72, D-66111 Saarbricken ISBN: 978-3-639-02346-6 To Kala and ChvisTable of Contents Ls of Tables Ust of Figures | Inroduetion| 1, The Theory of Compensating Wage Differentials and Pubic 'B1 Health and Retirement Study (HAS) .2 Current Population Survey (March CPS) (C. Methodology 1 Exploratory Data Anal (C.2 Matching and Estimation Methods €.23 Propensity Score Matching Methods D. Speciticaion of the Models V. Research Results ‘A. Description of Data Sets 'A.1 Demographic Characteristics ‘A Working Conditions A3 Fringe Benalils B44 Wage and Compensation Difterentiais References Eibiography Appendices ‘Appendix A: Tables Appendix B: Figures List of Tables Estimated Public’Private-Sector Wage Differntials ‘Wage and Compensation Difierentils Crs: ings areas Table Decision Models TableAS Matching Results Table A10 HRS: Regression Results by Sector (GPS: Wage and Compensation Ditlerertials List of Figures Figure 2.1. Indifference Curves Between Wages and Clean Working Environment Figure 22 Hedonic Wage Function Figure 23 Wage Equally Betwoon the Public and Private Sectors Figure 8.1 HRS: Demographi Figure B2 CPS: Demoge Figure 8.8 HRS: Working Conditions by Sector Characteristicsobtained should be, It not totaly fee of bias, atleast closer to the actual diffrent In the last three decades many studies have atl the public and private sector in the since it exceeds what is necessary ‘Stucies have ried to explain this i rely on tho worker's characteristics. How can workers from both sectors be compared? Comparatilty implies that ‘workers have similar human capital, as wall a other productiviy-related characteristics So that they have the same likelihood of being employed in a specific sector. Using data from 1 sector, known as propensity score, Bes methods have proven to reduce substan ‘are not randomly allocated across sector Jes models, which are sallsfacion of the potter job atrbutes than those offered to workers found to underestimate the wage premium, ‘The HRS data set showed a high level of homogeneity among worker iiferences in means between the two sectors in most ofregated by level of government inthe “The remainder of this works structured as folows: Chapter 2 analyses the ‘theoretical framework ofthe theory of compensating wage diferentia's and competitive rent-seeking inthe public sector labor market; Chaptor 3 provides a review ofthe general torture regarding public-private earings comparisons; Chapter 4 states the objectives of the study and the methodological approaches implemented, including data description and ‘made! specication; Chapter 5 presents and discusses the results; and Chapter 6 Fighlights the contributions tothe existing Iterature and provides implications for furthor research Il. The Theory of Compensating Wage Differentials and Public and Private Wage Determinat ‘The theory of competitive labor markets sta {obs up tothe point wnere wages equal workers and firms are assumed to be homogeneous, freely entering an market, such that the allocation is random and the labor market equilorium is Characterized by a single wage. However, this assumption about homogeneity is obviously hard to sustain: workers ifr in their skis as well as in thelr valuations of job attibutes, ‘such that they wil sol-selec into the jobs that maximize their tity, based onthe entire Job packages offered. inthe ins difer in tho job atibutes they offer. They will ‘Compare the costs of offering better working conclitions with tho wage savings these ‘eondtions imply, choosing the option that maximizes their profit, This drastioaly changes ‘the nature ofthe labor market equilbrium since allocation is no longer random and the ‘equilibrium cannot be across jobs, but the whole package of advantages and disadvantages they ofr ‘The equalizing wage diferential principle has found its most widespread use as a their attributes. These atibutes ‘consumed” by workers: fms offering agreeable working conditions must i 1 19 Maan fain 7) 5pay lower wages, a it workers were “buying” be detarmined by the comparison between Aw and Z. As Aw increases, more f bribed into the dity cocupations (the supply curve is upward-sloping) Figure 2.1 INDIFFERENCE CURVES BETWEEN WAGES AND CLEAN WORKING ENVIRONMENT he level of wages must adjust such the number of jobs otered. Notice that A fv. since dry jobs pay more that clean jobs, based on the assumption that workers dirty jobs, ‘eget ne rafornos coer we upwarslorg ene yo tay nee donut oat ole cnctoiy ow wager nosso Sonos 6‘vaiables biases the results, n addition tothe problems faced when measuring job ‘This model can be applied fo many other job charactritcs, such as probably of atibutes. injury, whether ‘components of the net advantage that workers try to have inspired the ith also suggests ot ‘maximize when choosing an occupation. Some ofthese componer development of two major applied economic models: the human capital model and the hedonic wage function approach. Particularly, besides ‘of employment, Smith stresses job characteristics regarding job ‘A. The Human Capital Model 'As mentioned previously, itis not just that jobs have diferent characteristic, but ‘so that individuals have diferent abilities and skl, refered to as human capita, This ‘human capital generally includes schooling, on-the-ob training and experience. The iticuty and expense of learning was ist addressed by Adam Smith when he writes: “When any expensive machine is erected the extraordinary work to be performed by before its worn out, t must be expected, wil ‘of competion in crowded professions, and possibilty of recognition), and responsibly borne by workers. According te Smith, when comparing workers who enjoy stable jobs the ‘whole year (manufacturers) wit those whose employments depend on climate coneitons and customers’ needs (bricNayers) he states that {for those workers entrusted with valuables, high ‘order to reduce their temptation to be dishonest. “Wxpocted, over and above the usual wages of common labor, wl replace to him the whole e of his education, wih at least the ordinary profit of an equally valuable capita” icy wages rather than in the compensating wage context as a job characteristic 3h workers should be compansatod. In their attempt to test the theory, a8 well as to ty characteristics, researchers of earrings’ determinants have found evidence ‘existonce of compensating ferences, providing ‘clear suppor with uncomfortable ‘exceptions *1o the theory of compensating wage diferentials based on job characteristics. ‘The studies show ambiguous results concerning the effect af some job characteristics such as physical strength, nonfatal injuries, work pace, and flexible work schedule on wages. However, there is strong and consistent evidence of a postive effet of risk of death on wages." The common explanation given to thi failure is thatthe omission of relevant ‘The importance of human capital regained intrest in the late 19508 with the work by Mincer (1958), whose concem for precise estimates ofthe rates of turn to nt types of investments in human capital led him to empirically conceptualize the and expense of leaming in the human capital theory His original model considers fas the basic source of heterogeneity of labor incomes. He subdivide training into al raining (formal schooling and on-thejob-treining, S) and informal taining 129, 7). The empirical model he uses for estimating the rate of rturn to human Investments is given by stimate the “pice” of nonwage: LE = Ba + BsS+ BeT- Bat? @ E:topresents the average leve of earnings of full-year workers in occupation i aati Nh, epresent tne returns to schooling and experience, and fs captures the concavity of fapeteaton fr the weary of otang Sternatho bias in the estimated "prices" of nonwage charactoritos of jobs are the focus ot studios using hedonic wage equations. BB, Hedonic Wage Function jb jis given by w, and his‘where perfect competition forces them to operate. Assuming tha the working condition rlcular case of two tes (x land ¥) and two workers (A and B) to narrow over ime as the Jabor markot moves toward the equiltrium. Second, are equalizing differences that arise “ms Higher wages are paid to compensate workers for negative job attributes. Finally, wage als can reflect unmeasured labor quality. The last two explanations are related to measurement probiems, since the comparison ignores diferences in nonpecuniary costs Fiquo22 HeDoWuc WAGE FUNCTION In this scenario, worker A dishes risk the most, such that he prefers to work at firm Xwhich offers safe working conditions. Worker Bis less risk averse, so he will rer to ‘ork a fim Y. The point P, and Ps give the actual wage-rsk combinations observed inthe ‘market. The locus ofall these possible points represents the hedonic wage function, which ‘summarizes the relationship between wages paid and working condliions offered. Is positive slope indicates tha trade-off between wages and risk, and also represents each worker's reservation wage, ‘Some studies have attempted to estimate compensating wage dtferemtals by 10 bo characterized by public sector workers showing higher Jenure and experience, on average, The evidence on the direction and magnitude of ing diterentials between sectors for other characteristics however, are fo, Aproblem arises when applying the principle of compensating wage fo the public sector, since the employment decisions and the wage-seting {8 ciforent in the public sactor compared to the rest ofthe economy. In act, the in rot a profit-seeking agent, and its outputs not subject tothe conventional ‘a/ket competition as happens in the private industry. 13il be overpaid for the type of job they perform, but not forthe stock of human capital they have. Even though this mechanism may equate compensatior ‘human capita) botween the public and private sector, the be not efficent, since overqualiied workers in the publi productivity levels compared to what they would have Bellante and Long (1981) suggest public sector workers compete for ‘rent as indicated before, human capital returns may bo equal in both sectors only atthe ‘margin. If pubic employees were able 10 sell rights to ther jobs and decide to hold them, this would resutin an opportunity cost that would offset evan the inframarginal rent. The ‘only way to receive the rent is by keaping their obs, so that ane should expect higher average age and tenure for workers inthe public sector, However, his expectation may * re publ sooo wages corprabl oan inte pata sco, fr ro nt ial br a isang atten wouter Reo men returns in the public sector and inthe private sector. 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