The public-private sector wage gap in Lithuania: evidence from social security data

Abstract

This paper estimates high-dimensional fixed effects models using detailed administrative data to characterize the public-private wage gap in Lithuania between 2010 and 2020. We quantify that public sector employees earn, on average, 10% more than their private sector counterparts. A decomposition exercise reveals that public sector employers pay only 0.3% less to all their employees, suggesting that the existing premium is not due to organization-specific wage policies. We also document that women benefit from working in the public sector, as they have a 16% premium due to both being employed in organizations with higher premiums and having higher returns to individual-specific components compared to women in private firms. In contrast, men have higher returns to unobserved permanent heterogeneity, which are particularly high for public sector workers, but they are with employers that have lower premiums relative to men in the private sector, resulting in an observed public sector premium of 4%. Our results highlight the importance of using mobility across firms, not just across sectors, and of isolating firm-specific wage components from other sources of wage variation to properly understand the sources of pay differentials across employers with different wage-setting protocols.