Public Sector Employment and Earnings Differentials Across Countries : The Importance of Employee Preferences

This study uses individual-level data from Denmark, France, Germany, Norway and Switzerland to estimate the effects of employment in the public sector on earnings. The lack of a profit motive in the public sector may affect the types of workers who choose to work for the public sector. Using employee preferences over sector of employment as an instrument, the results reveal that sorting accounts for most of the difference in predicted earnings between the sectors. Previous studies that did not account for sorting appear to have overestimated the returns to working in the public sector. This pattern is evident in each of the countries studied