Are Public Sector Workers Underpaid? Appropriate Comparators in a Developing Country

How to align public sector compensation with the market? In industrial countries, a common reference is the salary paid by private employers for similar jobs. But comparable jobs are formal, whereas in developing countries the relevant alternative for many public sector workers is in the informal sector. Another approach uses as a reference the earnings of similar workers in the private sector, regardless of whether their jobs are formal or informal. A potential shortcoming of this second approach is that workers may differ along characteristics that are unobservable. We assess the importance of this shortcoming by relying on five econometric methods, four of which “correct” the bias from unobservable characteristics. The focus of the paper is on state-owned enterprises in Vietnam. Recruitment into these enterprises was explicitly based on political loyalty and other unobservable characteristics of the workers. A massive downsizing program, whereby the most entrepreneurial workers left, may have exacerbated the selection bias. However, all the results obtained with the “workers approach” fall within a relatively narrow range. They suggest that workers in state-owned enterprises are overpaid by 20 percent or more. The “jobs approach”, on the other hand, indicates that they could earn 2 to 6 times more in the private sector.