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Resolving the public-sector wage premium puzzle by indirect inference

Minford, Patrick, Wang, Yi and Zhou, Peng 2019. Resolving the public-sector wage premium puzzle by indirect inference. Applied Economics 10.1080/00036846.2019.1648748

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Abstract

This paper investigates the public-sector wage premium (PSWP) in the UK using a microfounded economic model and indirect inference (II). To answer the question whether there is public-sector wage premium, we ask an equivalent question – whether a model assuming perfect competition can explain the data. The neoclassical labour economic model is tested and estimated without introducing any ad hoc gap between the theoretical and empirical models. Popular econometric models are used as auxiliary models to summarise the data features, based on which we evaluate the distance between the observed data and the model-simulated data. We show that it is not the non-market factors, but the total costs and benefits of working in different sectors and so simple market forces, that create the public-sector wage premium. In other words, there is no inefficiency or unfairness in the labour market to justify government intervention. In addition, selection bias test can be incorporated into the indirect inference procedures in a straightforward way, and we find no evidence for it in the data.

Item Type: Article
Date Type: Published Online
Status: In Press
Schools: Business (Including Economics)
Publisher: Taylor & Francis
ISSN: 0003-6846
Date of First Compliant Deposit: 19 August 2019
Date of Acceptance: 7 August 2019
Last Modified: 20 Aug 2019 10:08
URI: http://orca.cf.ac.uk/id/eprint/125001

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