Public and private sector wage distributions controlling for endogenous sector choice

We apply the instrumental quantile regression estimator of Chernozhukov and Hansen (2004b and 2006) to examine the wage structure in the public and private sector in Germany. Assuming exogenous sector choice, we find a negative mean public sector wage premium and show that the wage distribution is more compressed in the public sector. Correcting for endogenous sector choice reverses the findings concerning the mean premium but preserves the more compressed structure of the public sector earnings distribution. Since the original estimator loses its good properties if we allow the public sector premium to vary with the covariates, we propose computationally convenient estimators that achieve good small-sample properties. Applying these estimators, we find that returns to experience and education are generally higher in the private sector.