Public-private sector pay differentials in a devolved Scotland

Journal of Applied Economics. Vol IX, No. 2 (Nov 2006), 295-323

PUBLIC-PRIVATE SECTOR PAY DIFFERENTIALS IN A
DEVOLVED SCOTLAND

Axel Heitmueller^*

London Business School and IZA Bonn

Submitted June 2004; accepted June 2005

The public-private sector wage gap in Scotland in 2000 is analysed using the extension
sample of the British Household Panel Study (BHPS). Employing a switching regression
model, and testing for double sample selection from the participation decision and sector
choice, the wage gap is shown to be 10 % for males and 24 % for females. For males this is
mainly due to differences in productive characteristics and selectivity, while for females the
picture is more ambiguous. Findings also suggest that there exists a male private sector wage
premium. While there is no evidence of a sample selection bias for females, the sector choice
of males is systematically correlated with unobservables. Furthermore, the structural
switching regression indicates that expected wage differentials between sectors are an
important driving force for sectoral assignment.

JEL-Classification: J71, J31, C24

Keywords: wage differentials, switching model, double sample selection, decomposition

I. Introduction

Devolution has brought partial political and economic independence to some
regions in the United Kingdom. Prominently, Scotland is among those regions and
has elected its own parliament in 1999. However, devolution has had surprisingly
little impact on public sector pay setting arrangements across the country while it
may have increased the relative size of the sector in devolved regions. The aim of
this paper is therefore to establish whether a Scottish public sector earnings premium
exists at the outset of the devolution and how, if at all, results differ compared to

^* I benefited from comments by Pierre-Carl Michaud, Hartmut Lehmann, Kostas Mavromaras
and discussions with Steven Stillman. I am also very grateful for comments by my colleagues at
CERT and two anonymous referees. This paper does not reflect the opinion of the Prime
Minister’s Strategy Unit. Correspondence address: London Business School, Centre for New &
Emerging Markets, Regent’s Park, London NW1 4SA, UK +44 (0) 20 72625050 email:
[email protected].

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