Public-private wage differentials in the Western Balkans

Public-private wage differentials in the Western Balkans Marko Vladisavljević, Edlira Narazani, Vojin Golubović Skopje, 2017

Content of the presentation Introduction Wage settings and institutional factors determining the differences in wages Overview of the empirical research on the public-private wage differences - Recent trends on the public sector wage premium - Comparative studies in the Western Balkan countries - Research on individual countries Analysis of the macro-level data Conclusions 2

Introduction Importance for public policy implications Underinvestigated in the Western Balkan countries The division between public and private sectors, remained one of the foundations of the duality of the labour market in the Balkans The aim of the paper - to give an extensive overview of the recent research on the public-private wage differences in the Western Balkan region and to compare the size of the wage differences between the countries 3

Wage settings and institutional factors determining the differences in wages Market vs. Political decisions in wage settings Public sector employers wants to present themselves as good employers by setting the wages for the low-skilled workers at higher level than in the private sector. On the other hand, wages for the high-skilled workers are set at lower level than in the private sector, to avoid the image of high and unjustified spending of the government money (Giordano, 2011) As the low-wage workers make a larger share of workers this effects puts public wages at higher level than the private wages, on average. 4

Wage settings and institutional factors determining the differences in wages If the public sector wage premium is positive, it is considerably higher at the lower levels of wage distribution, while significantly lower or negative at higher parts of the wage distribution. If the premium is negative, i.e. if the wages are ceteris paribus higher in the private sector, the lowest differences are found at the bottom of the wage distribution. The premium also typically varies across the public sector and may be negative for some groups, such as high-skilled 5 occupations.

Wage settings and institutional factors determining the differences in wages Models of wage setting in the public sector: legislative government decisions and collective bargaining Theoretically, in a situation in which collective bargaining is a dominant wage setting model the public sector premium should be higher, as the public sector workers have higher bargaining power. However, recent research (European Commission, 2014) show that the rights of bargaining and association in the public sector are not related to the size of the premium. Furthermore, union density in public sector also has no significant effect on the premium. 6

Wage settings and institutional factors determining the differences in wages In the countries where private sector job security is higher the government needs to pay higher wages to attract workers to the public sector. Finally, the public sector size is found to correlate negatively with the public sector wage premium, indicating that when government has more monopsonistic power, its bargaining position is better and it can set the public wages at lower level, thus lowering the wage premium. In transition countries the public sector wages were significantly lower than in the private sector at the beginning of the transition, but that this advantage of the private sector disappears when the country reaches the maturity of economic transition. In addition, 7 for some countries, at the end of the transition, public sector premium becomes positive, indicating a convergence between trends in developed countries and countries in transition.

Wage settings and institutional factors determining the differences in wages Lower wages in the public sector at the beginning of the transition Why? - In the initial stage of economic transition, the countries' budgets are under control due to the significant fiscal and inflationary pressures, while the impact of the trade unions in the public sector on wages is relatively low. - Lower wages in the public sector are due to public enterprises' reconstruction and privatisation, which at its beginnings "shifts" high wage earners from public to private sector, as the most successful firms were usually privatized first - private sector wages were higher due to lower job security and lack of other benefits in the private sector, but also due to private sector employers desire to motivate their employees for efforts that are essential when starting an enterprise. The trends suggest that the negative public sector premium, approaches zero or becomes positive after the country reaches a more mature stage of transition, indicating that previously described market economy mechanisms become more dominant. 8

Overview of the empirical research on the public-private wage differences Macro level data Micro level data Most recent micro-level data analysis show that the wages in the public sector are higher than in the public sector, for comparably skilled workers. The analysis of the data from 86 countries, over the course of three decades indicates that the wages in the public sector are ceteris paribus higher by 10.1%. On average, public sector wage premium is higher in the emerging markets (11.7% on average) and developing countries (12.8%) than in the advanced economies (5.4%). The premium is higher for women than for men (8.6 vs. 6.3%), and higher for the lowskilled workers than for the high-skilled workers (7.6 vs. 1.6%), therefore making the public sector wages more compressed the wages 9 in the private sector. These effects are particularly strong in the low-income developing countries (IMF, 2016).

Overview of the empirical research on the public-private wage differences According the European Commission report (2014), the wages in the EU public sector were higher than in the private sector. (the public sector wage premium in EU is estimated at 3.6%, with significant differences by countries) Wages for the "same" work are higher in the private sector. Contrary to the findings from the IMF report the premium is higher from men than for women, but in accordance with previous research the premium 10 is the highest for the workers with low education, while for the workers with tertiary level of education it is negative.

Overview of the empirical research on the public-private wage differences Comparative studies in the Western Balkan countries The comparative research on the public-private wage differences in the region is almost non-existing. there is no comprehensive research that compares the publicprivate wage differences across all WB countries. The only study which deals with the public-private wage differences and compares them for at least two countries in the WB is unpublished work by Shehaj et al. (2015) on Albania and Kosovo (based on the data extracted from the Kosovan Household Budget 11 Survey Database (HBS), 2011 and the Albanian Living Standard Measurement Survey, 2012.) Limitations for Kosovo (gender)

Overview of the empirical research on the public-private wage differences Comparative studies in the Western Balkan countries Results of the Oaxaca decomposition indicate that there is an unadjusted wage gap in favour of public sector employees in Kosovo which amounts to 21% for men. They also find that should the public sector employees bear the characteristics of their private sector counterparts, their wages would be lower and this might trigger important changes in the skill distribution among public and private sectors as consequently affect the overall labour market efficiency. Public-private sector wage gap in Albania (2012) and Kosovo (2011) Unadjusted pay gap Adjusted pay gap (public sector wage premium) 12 Women Men Women Men Albania 0.305 0.155 0.044 0.043 Kosovo - 0.210-0.020

Overview of the empirical research on the public-private wage differences Comparative studies in the Western Balkan countries In Kosovo, average wages are higher in public compared to private sector and this gap varies along the wage distribution in the way that at the low tail of the distribution the portion of the public sector wage gap is accounted by differences in returns to characteristics whereas at the mid and high wage levels, due to better endowments of men employed in the private sector. The empirical evidence for Albania (covering both men and women) indicate that the wages in the public sector are about 15% higher than in the private sector in case of men and most of this wage differential comes due to the characteristics of the employees. The wage gap is higher in the case of women (30%) and explained by the differences in characteristics of the employees in the two sectors while the returns to characteristics 13 are statistically equal for both groups. The decomposition of this difference into the endowment, coefficients and their interaction indicates that similar to Kosovo most of the difference is due to the characteristics of the employees.

Overview of the empirical research on the public-private wage differences Comparative studies in the Western Balkan countries For both countries private sector productivity and services could have been better if the public sector would not be employing the most qualified individuals. Moreover, the differences in returns to characteristics for low wages may indicate that the private sector is not strictly implementing the minimal wage requirement. 14

Overview of the empirical research on the public-private wage differences Comparative studies in the Western Balkan countries Avlijaš (2013) use LFS data from 2008 to 2011 for Serbia, Macedonia and Montenegro to estimate the gender pay gap in these countries Data enable the analysis of differences between the public and private wages. Public-private sector wage gap in Serbia, Macedonia and Montenegro, 2008-2011 Unadjusted pay gap Adjusted pay gap (public sector wage premium) Women Men Women 15 Men Total Serbia 0.422 0.345 0.204 0.147 0.193 Macedonia 0.463 0.326 0.164 0.129 0.157 Montenegro 0.17 0.02 0.062-0.011 0.017

Overview of the empirical research on the public-private wage differences Comparative studies in the Western Balkan countries In Serbia and Macedonia, for both genders, the wages in the 2008-2011 period were considerably higher in the public sector than in the private sector. The difference in wages was larger for women, whose average wage is higher if they work in the public sector by 42.2% and 46.3% in Serbia and Macedonia respectively. For men this difference is slightly lower, at 34.5% and 32.6% in Serbia and Macedonia respectively. For both countries (and both genders) the gap decreases significantly when controlled for other labour market characteristics (such as education, working experience, occupation, etc), due to the fact that public sector workers have better labour market characteristics. The public sector wage premium was estimated at 19.3% for Serbia and 15.7% for Macedonia. The premium, for both countries is higher for women than for men, although the differences in the premium are lower than the differences in the unadjusted gaps. In Montenegro, for the same period, women on average have 17% higher wages in the public than in the private sectors, while for men there were 16 no significant differences in the wages between the sectors. After controlling for other labour market characteristics, the gap for women lowers to 6.2%, while for men it remains insignificant. Overall, estimated public sector wage premium in Montenegro, unlike in Serbia and Macedonia is insignificant.

Overview of the empirical research on the public-private wage differences Research on individual countries Serbia - Jovanovic and Lokshin (2003), Krstić, Litchfield and Reilly (2007), Arandarenko (2011), Lausev (2012), Vladisavljević (2016) Albania - Veneziani (2010), Agolli et al. (2010) Macedonia - Angel-Urdinola (2008), Petreski et al (2014), Blunch (2010) Bosnia and Herzegovina - Djukic (2009), Wb report Bosnia (2012) 17

Analysis of the macro-level data Analysis of the trends of the wages in three NACE (rev 2) activity sectors: Public Administration and Defence; Compulsory Social Security (sector O), Education (sector P) and Human Health and Social Work Activities (sector Q). In this part of the analysis we focused on the wages of the public sector in its narrow sense, the so-called "state" sector, which inlcudes public adminstration, education and health The average levels of the wages in the countries are compared, expressed as the ratio of the sector wages to the countries average wage. The data are collected from the official websites from the national statistical offices and the available statistical reports. 18

Analysis of the macro-level data Public Administration and Defence; Compulsory Social Security Between 2008 and 2015, the ratio of wages in the public administration sector to average wage, was the highest in Bosnia and Herzegovina and Albania. In 2014 the ratio stood at about 1.4, for both countries, indicating that the wages in this sector were by 40% higher than the average wage, which is higher than for all the European countries where this data is available. Ratio between the average wage in the public administration and average wage 19

Education Analysis of the macro-level data In all the countries the average wages in education sector are lower than the wages in the public administration, which is also the case in the majority, but not in all European countries analyzed. Among the Western Balkan countries the ratio is the highest for Albania, where the wages in education sector are by about 20% higher than the average wage, which makes Albania one of the countries with the highest ratios in Europe. The wages in the region (with exception of Albania), in 2014 were at the level of the average wages in the country, which is the result found for the majority of the European countries. The countries, however, differ in the general trends of the wages in recent years Ratio between the average wage in the education and average wage 20

Analysis of the macro-level data Human Health and Social Work Activities The ratio between the wages in the Health sector and the average wage between 2008 and 2015 was the highest in Bosnia. The trends indicate that the wages in health sector in Bosnia were at about 25% higher than the average wages, clearly separating Bosnia and Herzegovina from other countries in the region, but also indicating a higher level of wages from all the European countries where this data is available. The wages in the health sector of Serbia and Montenegro had similar trends as the wages in the education sector. 21

Trends for Kosovo The analysis for Kosovo wages in these sectors is not fully comparable to the analysis for other sectors, due to the fact that the data on average wages are collected from the Structural business survey, which included only the information on private sector wages. For the public administration sector, the wages for Kosovo are available only separately for two sectors which according to NACE rev2 classification belong to sector O in other countries: General public sector services and Public Order and Security. The wages in both sectors started the period below the average wages (earning about 12 and 20% lower wages on average), and that throughout the period wages increased and now stand at the higher by about 37% than the average private wages. The large growth of the ratio is not due to the lower average wage in the private sector, but the fact that the wages in these sectors doubled in 6 years.

Trends for Kosovo The wages in the education and health sectors started of below the average wage in the private sector (by 15% and 39% respectively), but with a sharp increase, especially in the health sector, they reached the level above the average private wages (by 17% and 32% respectively). Ratio between the average wage in different activities within the public sectors, compared to the average wages in the private sector in Kosovo, 2008-2014 2008 2009 2010 2011 2012 2013 2014 General Services 0.88 1.22 1.31 1.30 1.25 1.16 1.37 Public Order and Security 0.80 1.05 1.16 1.28 1.22 1.23 1.38 Education 0.85 0.97 0.96 1.12 0.99 0.93 1.17 Health 0.61 0.94 1.24 1.16 1.12 1.19 1.32

Conclusions The wages in the public sector in the Western Balkans are, on average, higher than in the private sector. There are large differences between the countries in the size and the characteristics of the public-private wage gap. The gap seems to be the lowest in Montenegro, where the wages in the three sectors are the lowest compared to all countries, but also compared to the European countries for which the data are available. Additionally, according to re-analysis of the study by Avlijaš et al. (2013) the unadjusted gap is significantly lower than in Serbia and Macedonia, while the adjusted gap is insignificant. In recent years the wages in the public sector in Montenegro seem to be on the rise therefore converging to trends in other countries.

Conclusions The public sector wages in Albania and Kosovo are, on average higher, than the wages in the private sector. These differences seem to mainly due to the fact that the skilled workers in Albania and Kosovo work more frequently in the public sector. When controlled for these differences, the adjusted gap in these countries, similarly to Macedonia is insignificant. The macro-level data for Albania, comparable only for 2014 and 2015 show that the wages in this country are particularly high in the public administration and especially in the education sector, both comparable to the region and wider European context. On the other hand, the macro-level analysis of the public sector wages in Kosovo was not comparable to other countries, but indicates a strong increase of the wages, especially in public administration and health, and in a lesser extent also in education. The wages in all three sectors almost doubled in the course of six years (between 2008 and 2014).

Conclusions In Serbia and Macedonia, the difference in wages between the public and private sectors cannot be fully explained by the better labour market characteristics of the public sector workers. Therefore the public sector wage premium is positive and estimated at relatively high level compared the public sector wage premiums in other countries (European Commision, 2014; Giordani et al, 2011). According to re-analysis of the data available from the Avlijaš et al. (2013), the public sector wage premium is estimated at 19.3 and 15.7 for Serbia and Macedonia respectively. Serbia is also the only country for which the research on the public sector wage premium exist since the mid 1990s. These research indicate that the public sector wages had the same trend as in the transition countries: at first they were, ceteris paribus, lower than in the public sector, but then as the transition unfolded, the differences between the sectors were lowered, and at the end of the period the wages became higher in the public sector. This trend could be somewhat reversed as the government imposed the fiscal consolidation measures in 2014, which resulted in significant drop of wages in 2015.

Conclusions The difference between the wages in Bosnia and Herzegovina seems to be the highest in the region(in 2008 the public sector wages were higher than wages in the private sector by 55%). This result is confirmed by our macro-level analysis which indicates that the ratio between the wages in the public administration and health sectors in Bosnia is by far the highest in the region and compared to the European countries for which the comparable data are available.

Conclusions The micro-level research also point to the two additional results. Firstly, the available micro-level analysis suggest that in Albania and Kosovo (Shehaj, et al, 2015) and Serbia (Vladisavljević, 2015) the public sector wage premium is the highest at lower parts of the wage distribution, and the lowest (or insignificant) at higher parts of the wage distribution. This result is comparable to the results found in other European countries, and suggests that the estimated results are robust. On the other hand, the majority of the studies mentioned here ignore the fact that the wages in the public sector can be split to public sector enterprises and state sector, which includes public administration, education and health. Arguably, the wage setting in these subsectors can be different, as the wages in the public enterprises could be more connected with the results of the companies. This difference could be relevant as estimated public sector wage premium is (significantly) higher for the workers in the public companies than for the workers in public administration. The public sector seems to offer better conditions for work in general, which remains one of the main characteristics of the labour market dualities in the region..

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