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Public-Private pay differentials in Vietnam

Clement Imbert
Paris School of Economics, France

This paper compares wages and non wage benefits earned by Vietnamese public employees
to earnings in the (mostly informal) the private sector from 1993 to 2006. We document the
fact that the advantage of public sector workers didn't decrease, but rose considerably after the
transition to market economy. To explain this rather counterintuitive finding we use a simple,
yet innovative method to decompose public private sector earnings differences. We distinguish
between the effect of changes in workers characteristics and that of changes in returns to these
characteristics in the two sectors. Panel data techniques allow us to take into account the effect
of unobserved workers characteristics along with observable ones. We argue that selection is
important to explain public private differences but does not explain the observed increase in the
public wage premium ; rather change in the returns to skills is the driving factor. We interpret
these findings as a consequence of the twofold choice made by the Vietnamese government to
promote public entreprises and services as a motor for Vietnam's industrial development and
to favor the interests of public employees whose economic status was threatened by the reform
process.

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