Does the difference between public and private salaries increase social inequality?

Responsible researcher: Angelo Cruz do Nascimento Varella

Article title: PUBLIC-PRIVATE WAGE DIFFERENTIAL AND PER CAPITA INCOME INEQUALITY IN BRAZIL

Article authors: Pedro HGF Souza and Marcelo Medeiros

Location of intervention: Brazil

Sample size: 163,084 Brazilian workers

Sector: Job Market

Type of Intervention: Effects of the difference between public and private salaries

Variable of Main Interest: Income inequality

Assessment method: Others

Policy Problem

Social inequality is a considerable problem, especially for developing countries, such as Brazil. In addition to being an economic obstacle, inequality generates a strong negative social impact, which perpetuates poverty and its undesirable consequences. As a consequence, social inequality is a topic widely studied around the world.

A very important way to measure inequality in a country is to compare the difference between the salaries of those who work in the public sector with the salaries of those who work in the private sector. This is because this difference is a great tool for measuring whether a country's government is improving or worsening the condition of income inequality in its nation.

Implementation and Evaluation Context

The difference in salaries between the public sector and the private sector is evidence that the institutions of a country, in this case Brazil, have an influence on income inequality. In Brazil, it is possible to verify that the level of income in the public sector is higher than that observed in the private sector. In this way, it is possible to affirm that the Brazilian government, to a certain extent, increases social inequality in the country.

Furthermore, it is possible to state that this salary difference also influences the supply of work, as it generates a preference in society for public service, compared to the same activities in the private sector. This generates an accumulation of qualified individuals in the public sector, which ends up affecting the national market in different ways and at different levels.

It is important to highlight that workers in the public sector and the private sector also differ in their actions, even in cases where employees carry out the same activities. In Brazil, the public service offers special characteristics, such as hiring, stability and the absence of a profitable premise, which make this type of work better paid in the country.

In Brazil, this reality of salary difference can be observed since the 1990s and is stronger for workers with little education and for those who work in the Union and the Judiciary.

Policy Details

In turn, there are several other sets of factors that determine how much a public employee receives. These are conditions that come from the market, political actions and even the various peculiarities of this type of service, which is very different from what occurs in the private sector. Such factors can be divided into two effects, called composition and segmentation.

The composition effect refers to the set of factors that cause public sector workers to have higher educational levels on average, which results in better working conditions for these individuals. The segmentation effect is related to the set of factors and special characteristics that allow higher salaries to be offered to the public sector.

Methodology Details

With the aim of discovering how the difference in salaries between the public sector and the private sector impacts income inequality in Brazil, the researchers use data from the National Household Sample Survey (PNAD), carried out in 2009, by the Brazilian Institute of Geography and Statistics (IBGE). In total, the researchers collected data on the income, working conditions and other characteristics and socioeconomic information of more than 163 thousand people across Brazil.

After collection, the researchers divide the calculations of the mathematical models into two parts. Initially, the data is used to measure and quantify the difference between salaries in the public sector and the private sector, comparing jobs with similar characteristics. From this econometric model, the results are incorporated into a second model, which compares how these results impact the results of the Gini Index coefficients, which is an international indicator for income concentration and inequality, also used in Brazil. In this way, calculating the difference between salaries in the public and private sectors makes it possible to define the impact of this difference on social income inequality.

Results

Together, public sector workers account for 10% of the workforce in Brazil, while individuals employed by the private sector make up 40% of the national total. In all calculations carried out, the salaries of individuals working in the public sector exceed the same vacancies in the private sector by between 15% and 21%, being approximately 17% higher. In other words, on average, public workers receive up to a fifth more in their salaries.

It is also important to highlight that this increase is greater for higher positions, so the salary difference is greater for better positions, with higher salaries, which further contributes to national income inequality.

Another noteworthy point is the fact that the composition effects of the public sector are greater than the observed segmentation effects. In other words, the fact that public servants tend to be more qualified than private employees has a greater impact on social inequality than salaries themselves.

Public Policy Lessons

Social inequality is a problem of great importance for countries like Brazil. The problems generated by poverty and income concentration cause negative consequences in all strata of society, so combating inequality is a fundamental point in the country's healthy development.

Regarding the salary difference between the public and private sectors, it is important to consider the composition effect observed in Brazil, which considerably worsens national income inequality. It is important to consider that the public service concentrates a large part of the most qualified workforce and that increasing civil servants' salaries tends to worsen the undesirable situation of social inequality.

Reference

SOUZA, Pedro HGF; MEDEIROS, Marcelo. Public-private wage differential and per capita income inequality in Brazil. Economic Studies (São Paulo), v. 43, p. 05-28, 2013.