Productivity and Wage Differentials between Private and Public Sector in the Developing Countries (Gelismekte Olan Ülkelerde Özel ve Kamu Sektöründeki Verimlilik ve Ücret Farklilasmasi)

The structure of the public sector in developing economies is likely to affect private sector wage and employment decisions and hence, have an influence on the aggregate labour market. In this paper, excess public employment is analyzed under the efficiency wage framework to find out how wage and effort (productivity) differentials between public and private sectors actually affect the labour market or more specifically equilibrium levels of employment, wages and productivity. These differentials are assumed to be exogenous first but later on this assumption is relaxed and they are endogenized. The paper investigates how the total welfare responds to changes in these differentials in terms of two different models. The results show that an effort of raising employment by the government eventually leads to a reduction in total welfare by curbing private employment. We contribute to the existing work by providing a different approach by defining an explicit outside option, namely the government sector, to the efficiency wage theory.