Decomposing wage inequality: Public and private sectors in Vietnam 1993-2006

This paper studies the labor market in Vietnam during the transition towards market economy (1993-2006): we show that the public-private sector wage gap markedly increased, but that wage inequality decreased overall. Our aim is to assess how much of this evolution can be explained by workers' productive skills and their allocation between sectors. We use a simple, yet innovative, method that allows us to take into account workers' unobservable characteristics and their remuneration in each sector. Throughout the period we consider, public sector workers are more skilled than private sector workers. However, rising returns to workers' skills in the public sector play a major role in the increase of the public-private sector gap. Against all expectations, the public sector grew richer as Vietnam moved towards market economy. Finally, a greater homogeneity among labor market participants seems to explain the overall decline in wage inequality.