Public-Sector Wage Premium in Poland

by Gabriela Grotkowska (Author)
Monographs 204 Pages
Series: Polish Studies in Economics, Volume 13


This book assesses the size, structure and evolution of the public-private wage gap in Poland – a country frequently regarded as an example of a successful transition from a centrally planned economy to a market economy. The author extensively elaborates on the issue of the selection of employment, and reviews the available studies concerning the public-private wage gap in developed and developing countries, with a particular attention to the evolution of methodology. Furthermore, the author examines recent empirical studies on the public-sector wage premium. Contrary to former research, they have provided positive estimates of the average public-sector wage premium, with significant differences in terms of employee characteristics and local labour market conditions.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author(s)/editor(s)
  • About the book
  • This eBook can be cited
  • Table of Contents
  • Introduction
  • Chapter 1 Evolution of the public sector in Poland during the period of economic transition
  • 1.1. Shrinkage of the public sector
  • 1.2. Dualism of the public sector
  • 1.3. Comparing the incomparable: structures of employment in the public and private sectors
  • 1.4. What does the employment structure tell us about the wage structure?
  • Chapter 2 Undertaking employment in the public sector in Poland
  • 2.1. Theoretical aspects regarding the decision about choosing a workplace
  • 2.1.1. Economic modelling of the benefits from having a job
  • 2.1.2. Attributes of employment
  • 2.2. Selection of employment in the public sector in Poland
  • 2.2.1. Factors favouring selection of employment in the public sector according to the literature
  • 2.2.2. General comments on the empirical analysis of the selection of employment in the public sector in Poland
  • 2.2.3. Employment in the public sector versus demographics, family situation, and education choices
  • 2.2.4. Employment in the public sector versus beliefs and categorized values
  • 2.3. Employment satisfaction in the public and private sectors in Poland
  • Chapter 3 Review of the literature on the public-sector wage premium
  • 3.1. Causes of public-private wage differentials
  • 3.2. Empirical research on the public-sector wage premium: a review of international literature
  • 3.2.1. Evolution of methods
  • 3.2.2. Review of the studies and results: developed countries
  • 3.2.3. Review of the studies and results: transition economies
  • Chapter 4 Public-sector wage premium in Poland after a quarter of a century of economic transition
  • 4.1. Early studies on the public-sector wage premium in Poland
  • 4.2. Recent studies of the public-sector wage premium in Poland
  • 4.2.1. Public-sector relative wages: structural aspects
  • 4.2.2. Size and structure of the public-sector wage premium
  • 4.2.3. Spatial differences in the public-sector wage premium
  • 4.3. Summary and open questions
  • Concluding remarks
  • A note on data sources used in the analyses
  • Bibliography
  • Series index

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The share of the public sector in Poland regarding Gross Domestic Product (GDP) and employment is systematically degrading, however, its role in the Polish economy remains considerably more significant than in the case of fully-fledged market-oriented economies. In Poland, almost one in three employees work for the government or at a public company, while almost one-quarter of the total remuneration of employees receives salary directly from the central or local government. The government plays an even larger, even predominant role in the demand of many labour markets, such as the sector of schoolteachers or health workers.

The substantial role played by the public sector in the national economy is due to the fact that gross value added generated by the public sector represents more than one-sixth of Polish GDP, however, it also results from a considerable spillover into other sectors of the economy (Central Statistical Office, CSO 2015). The public sector is responsible for setting rules and regulations, designed to guarantee freedom of economic activity and of contracts. It also provides public goods, redistributes income and stabilizes the economy. Many public services are crucial for the effectiveness of economic activity. The functioning of the public sector, in particular, the ratio of productivity to its costs, affects the efficiency of the entire economy, growth rate and social welfare.

The mechanism of wage setting is one of the channels of public-sector spillovers into other parts of the economy. For institutional (the bargaining process and wage-setting schemes) and strictly economic reasons (arbitrage mechanism), the level and structure of wages in the public sector impacts wages in the private sector, and this, in turn, affects the overall competitiveness of the economy, inflation and other macroeconomic variables. The public-sector wage bill is significant for public finances, as it is in fact one of the main types of expenditure in the context of central and local government budgets. Wages in the public sector represent an important factor affecting the overall economic performance, as well as an interesting area for economic research.

There are several reasons for prevailing earning differentials between the private and the public sector. Profit maximization is usually regarded as the main goal of private companies, however a large part of the public sector is focused on ← 9 | 10 → delivering public goods and services, the redistribution of income and the realization of social and political goals. Consequently, a wage formation mechanism in the public sector is considerably regulated by political considerations. Wages in the public sector are insubstantially correlated to workers’ marginal productivity. However, the coexistence of both sectors within the same labour market (competition for workers) subjects the public to economic mechanisms. The wage structure in the public sector is more compressed; it rewards less-skilled workers and places restrictions on high-skilled salaries, especially for managers.

The public and private sectors differ in the structures of their respective economic activity. Areas where the public sector dominates are characterized by a relatively stable demand for its services, often determined by political decisions rather than market forces. Public-sector wages are less related to the business cycle, while private sector wages seem to be strongly pro-cyclical. As a result, public-sector relative wages are counter-cyclical: they increase in times of economic slump, which would justify the potential attractiveness of public-sector employment in times of economic crises. The literature also indicates that public-sector wages are related to electoral cycles. Moreover, the public sector is usually more unionized than the private one, which in turn strongly affects the wage-setting mechanism, giving more power to the labour supply side in wage negotiations. On the other hand, mostly in local labour markets, the public sector has a monopsonistic power, as it remains the only source of demand for workers with a higher education, thereby allowing it to dictate wage levels. Lower wages can be somehow compensated by other employment benefits, such as higher job security or more flexible hours.

Finally, there are significant differences in institutions that may explain the observed empirical regularities in the wage distributions. Although many countries have implemented reforms to introduce more market-oriented mechanisms to the public sector, there are prevalent differences in the recruitment process, wage-setting and collective bargaining coverage. The public sector is characterized by a higher degree of job security, but also strict rules of promotion and remuneration, related to job tenure, rather than efficiency.

Public sector workers often complain about being underpaid, however, statistics and research for different countries show that this opinion is not justified. In general, the observed regularity is that the average wage in the public sector exceeds the average wage in the private one. However, comparison of raw average wages could result in the misleading conclusion that the public sector offers higher wages than the private one. Largely, this premium can be attributed to the differences in the structure of populations employed in both sectors. For the specificity of public services, on average, the public sector employs people with ← 10 | 11 → a higher level of education than the private sector. Moreover, a typical public-sector worker is older than a private sector employee and has longer average job tenure. On the grounds of human capital theory, both of these factors ought to justify higher wages in the public sector. Let us pose a question, to what extent are the observed differences in the distribution of wages due to differentiated structures of employment in both sectors? What is the difference between the wage that an individual can expect in the private and in the public sector? How does this difference depend on the personal characteristics of an employee? Is it regionally specific? What are the potential consequences of the alleged difference between the wages offered to workers in both sectors? These questions have been motivating research on the public-sector wage premium for several decades. Studies in this area were first undertaken in developed countries, followed by research in developing economies. In the 1990s, a new strand of literature developed in response to the economic transition taking place in Central and Eastern European countries. Since privatization was one of the most important dimensions of the transition, the issue of private-public employment flows and wage differentials soon attracted the attention of labour market economists.

Research on the public-private sector wage gap is also a part of the wider discussion on the flexibility and mobility of the labour force. If markets were perfectly competitive, the arbitrage mechanism would lead to wage equalization. A significant difference in wages, combined with only minor inter-sector reallocation within the labour market, which is moreover persistent over time, may therefore lead to the conclusion that either significant barriers to the mobility of labour or non-wage benefits of employment exist, which do not allow for the observed wages to be equalized. If the public sector was to offer excessively high wages, this could lead workers to shift into more attractive jobs in the public sector. This, in turn, would push up private sector wages in order to retain employment. This could have consequences for overall economic efficiency, as well as cause general wage inflation.

Biographical notes

Gabriela Grotkowska (Author)

Gabriela Grotkowska is Assistant Professor at the Faculty of Economic Sciences at the University of Warsaw. She developed a particular interest in empirical analysis of the performance of labour markets, economics of education and the association between educational decisions and professional career.


Title: Public-Sector Wage Premium in Poland