Empirical work suggests the presence of a public sector wage premium. This paper investigates the theoretical reasons for the presence of such a premium. the results of the paper are consistent with the higher premium paid to women and with the fact that the premium decreases with skills. the key insight of the paper is that job security undermines the incentive to work hard and forces the public sector to pay higher wages. One implication of the paper is that the public sector wage premium can be used as an indicator of inefficiency of the public sector.
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