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Resolving the Public Sector Wage Premium Puzzle by Indirect Inference

A. Patrick Minford, Yi Wang and Peng Zhou ()
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Yi Wang: Cardiff Metropolitan University,

No E2017/13, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: This paper investigates the public-sector wage premium in the UK using a microfounded economic model and indirect inference. To answer the question whether there is public-sector wage premium, we ask an equivalent question—whether a model assuming perfect competition can explain the data. The neoclassical labour economic model is tested and estimated without introducing any ad hoc gap between the theoretical and empirical models. Popular econometric models are used as auxiliary models to summarise the data features, based on which we evaluate the distance between the observed data and the model-simulated data. We show that it is not the non-market factors, but the total costs and benefits of working in different sectors and so simple market forces, that create the public-sector wage premium. In other words, there is no inefficiency or unfairness in the labour market to justify government intervention. In addition, selection bias test can be incorporated into the indirect inference procedures in a straightforward way, and we find no evidence for it in the data.

Keywords: Public Sector Wage Premium; Selection Bias; Indirect Inference; Monte Carlo (search for similar items in EconPapers)
JEL-codes: C21 C35 J31 J45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lma
Date: 2017-10
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