The public-private wage differential in a poor urban economy : The public / private wage differential in a poor urban economy

World Bank Reprint Series: Number 261 David L. Lindauer and Richard H. Sabot The Public/Private Wage Differential in a Poor Urban Economy Reprinted with permission from Journal of Development Economics, vol. 12 (1983), pp. 137-52.  World Bank Reprints No. 225. George Psacharopoulos, "The Economics of Higher Education in Developing Countries," Comnparatie Education Rev)iew No. 226. Katrine Anderson Saito and Delano P. Villanueva, "Transaction Costs of Credit to the Small-scale Sector in the Philippines," Ecotlonomic Develolpment anid Cuiltnral Clianige, No. 227. Johannes F. Linn, "T/he Costs of Urbanization in Developing Coun- tries," E cononic D)ezel,opelnt antd Ctultlirtrl Chianige No. 22. G(uv P. Pfeffermann, "Latin America and the Caribbean: Economic Pi-rformaiice and Policies," Srulbueern Rev-ieuw of .A4.-fanioon,rat'11 anld Eco)nonuics N). 22 9. Avishay Braverman and Jo'seph E. 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Srinivasan, "General Equilibrium Theory, Project Evaluation, and Economic Development," Thle Tleiory anid Expecrietnce of EconioZmic Dev,elopm7ent  Journal of Development Economics 12 (1983) 137-152. North-Holland Publishing Company THE PUBLIC/PRIVATE WAGE DIFFERENTIAL IN A POOR URBAN ECONOMY David L. LINDAUER* Wellesley College, Wellesley, MA 02181, USA Richard H. SABOT* World Bank, Washington, DC 20433, USA Received February 1981, final version received June 1982 This paper considers how wage differentials may be generated between the public and private sectors of a developing economy. Data from a 1971 household survey of the Tanzanian urban wage labor force are used to determine the pattern of wage differences across employer groups. After standardizing by worker characteristics, public sector employees are found to have earned a substantial wage premium over workers employed in the private sector. The non-market character of these differentials is examined in light of a number of hypotheses on public sector wage determination. 1. Introduction The occupational structure of wages is generally more compressed in high than in low income countries. This may simply be due to the relative scarcity of educated workers, more generally of human capital, in poor nations. If so we can expect the wage structure to be compressed in poor countries, with obvious distributional consequences, as human capital accumulates in the course of economic development. Alternatively, the large wage premiums received, for example, by white collar workers may be due to non-market forces brought to bear on the wage structure by trade unions, multinational corporations, or the government. In this case the evolution of the wage structure in the course of development is less predictable. The role of non-market forces in determining the structure of wages is of interest for reasons of allocative efficiency as well as for distributional concerns. There is a strong presumption that the greater the distortion of the wage structure by non-market forces the greater the inefficiences in the *The authors would like to acknowledge the helpful comments of an anonymous referee. We also wish to thank Maurice Boissiere for his careful research assistance. The views reported here are those of the authors and they should not be interpreted as reflecting the views of the World Bank. 0304-3878/83/0000-0000/$03.00 t 1983 North-Holland  138 D.L. Lindauer and R.H. Sabot, The public/priv'ate wvage differential allocation of human resources, with consequent negative implications for the pace of economic growth. Our focus in this paper is on wage differentials between the public and private sectors in urban Tanzania in 1971. The general issue of public versus private compensation has not received nearly as much attention in high income economies as, for example, wage differentials between unionized and non-unionized establishments. In the United States this is because the 'prevailing wage rate' model has been used both to determine and hence explain government pay scales. The government is viewed as just another price taker accepting a market-determined rate. In a perfectly competitive labor market group affiliation does not influence wages. Irrespective of differences among groups of workers in goods produced, in the technology or organization used to produce them, in the profitability of such production, or in the ownership of the establishments in which they work, competition in the labor market will ensure that all workers with the same personal economic characteristics and preferences for work activity receive the same rate of pay. If public/private wage differences occur, they are generally interpreted, within the competitive model, as due to short-run adjustment problems to lags in government wage movements. Group affiliation matters only if non-market forces are sufficiently powerful to prevent competiton in the market from eroding differentials among homogeneous workers. The public sector holds a commanding position in the labor markets of many developing countries. It is not uncommon to find 50',, or more of all wage earners in the employ of the government or of parastatals.' Moreover not all governments of developing countries either choose or are in a position to choose the 'prevailing wage' model in setting their pay scales. Government pay policies are often influenced by distributional, fiscal, employment or political goals.2 In sum, in many low income countries the public sector has neither the need nor the desire, nor even the ability, to act as if it is another wage taker. In order to study the relationship of public to private wages, data for this analysis were obtained from the 1971 NUMEIST3 survey conducted by one of the authors. A random sample of households in Dar es Salaam and six other urban areas was surveyed. Over 5000 individuals including 1500 male 'The pay of government employees is generally governed by civil service pay codes. Parastatals are enterprises wholly or partly owned by the government but with some autonomy in factor and product pricing decisions. For a discussion of the relative size of government and parastatal employment in Africa see Lindauer (1981). 2There is evidence, for example, that in Tanzania, colonial wage and salary structures, geared to the supply prices of Europeans, were not dismantled at Independence because to do away with what many regard-d as the Fruits of Independence would have been politically untenable. See Sabot (1979, p. 210). 3National Urban Mobility, Employment and Income Survey of Tanzania.  D.L. Lindauer and R.H. Sabot, The public/private wage differential 139 African regular wage earners are included in the sample.4 Respondents provided information on their monthly earnings, non-wage benefits, education, employment history, and other personal characteristics, as well as the type of employer they worked for. Roughly one third of the sample fell into each employment category - private firms, government and parastatal enterprises.5 These proportions correspond to the distribution of employment by firm type reported in the 1971 Tanzania, Survey of Employment and Earnings. In section 2 below, we present measures of differences in mean wages between government workers and workers in the employ of privately owned enterprises, between parastatal employees and workers in private enterprises and between parastatal and government employees. Both G, the absolute differential and x, the relative differential, are presented where G = Wa-Wb and 0C=(Wa-Wb/Wb) with Wa representing the mean wage of the higher paid group. Measures of G disaggregated by occupation level are also presented and hypotheses to explain the public/private differential that remain are suggested. We go on to contrast a with the value of ,B, where ,B represents the average percentage by which the pay of group a exceeds that of group b after standardizing for various personal characteristics of the wage labor force. Standardization is performed by estimating a simple wage function of the following general form: In WL = f(XL), where the log of monthly earnings of the urbani wage earner is the dependent variable and XL is a vector of his characteristics. In addition to those characteristics generally found in both low and high income countries to be good predictors of earnings, included among the independent variables are dummy variables for ownership category of the worker's employer. The only other additional feature of the specification is a variable indicating whether the worker was employed in Dar es Salaam, the capital, or in one of the six smaller towns included in the sample. ,B is derived from the coefficient on the ownership dummy denoting group a (the high paid group, with group b as the base category) in the earnings function for the full sample.6 In an aggregate earnings function such as this where the coefficients on the independent variables are constrained to be the same for all ownership groups, /B can be a misleading indicator of the magnitude of standardized wage differences between ownership groups if there are marked differences in 4Wage earners include employees of all firms, regardless of size. In this way this survey differs from most formal sector establishment surveys wlhich usually select some arbitrary, usually 10 or 20, employment level as a cut-off point. Most African wage data are derived from such sources and thus exclude a sizeable proportion of private sector wage labor. Our sample does not exhibit this bias. Furthermore, since our sample is based on a household survey, it is not biased toward public employees as is often the case with establishment data which may suffer from underreporting of the private sector. 5Specifically, private firms accounted for 31.8