We investigate the drivers and effect of high public sector wage premium and other characteristics in developing countries and analyse the interplay between the public and private sectors in terms of job creation, productivity, workers' composition, and wages.

We have produced a detailed empirical description of labour market outcomes in poor economies, focusing on the difference between the private and public sectors (earnings, wages' dispersion, sector sizes, workers' mobility) based on individual-level data for a number of Sub-Saharan African countries. We have also developed a frictional labour market model that is uniquely fit for the least developed countries to quantify the effect of the public sector wage premia on wage employment and productivity growth. The model has a search and matching framework with costly firm entry, two-sided heterogeneity (firms and workers) and the public sector. We plan to estimate it using microdata for a number of Sub-Saharan African (SSA) countries.

We hope that our study will bring the attention of academics and policymakers to the existing data sources that are available for public use in SSA countries and will help promote empirical and theoretical research on poor economies. The key labour market statistics derived from our analysis, in combination with macro-level indicators (e.g. Doing Business indices), can inform structural macrodevelopment models of these countries. Our estimated model can be used as an analytical tool to assess the potential and limitations of alternative policies.

This project is funded by Structural Transformation and Economic Growth (STEG) programme research grant SRG 33.