Factors influencing the public-private wage differential in

In the following section several factors that should have an impact on the public-private sector wage differential, as pointed out in the previous chapter, are investigated. Among these factors the dynamics of the bargaining power of trade unions both in the public and private sector and the evolution of non-wage labour compensation in both sectors will be investigated.

The effect of trade unions on employment and wage levels in Estonia is likely to be low, as trade unions and collective bargaining do not play a significant role either in the public or private sector in Estonia. In 2000, only 16% of the employed were members of trade unions and collective bargaining covered only 14% of wage contracts. Trade union membership is higher in the public sector since 20% of public sector employees and 8% of private sector employees were union members in 2000. Trade union membership has decreased over the transition period, although precise data does not exist about trade union membership over the entire transition period (Kallaste, 2004).

Collective bargaining is used more in the sectors of healthcare and education, which belong mostly to the public sector, and also in transport, energetics and mining, which belong both to the public and private sector (Rõõm, 2003). As the public sector tends to be more unionized, then the low unionization of the Estonian labour market should lower the public-private sector wage differential.

Some public sector employees have better access to fringe benefits and job protection. Public sector employees have lengthier paid vacations and in very few cases better pension schemes, but not all public sector employees are eligible for these kinds of benefits. Fringe benefits are most generous for civil servants, whose employment is regulated by The Public Service Act (Avaliku teenistuse seadus). That legislation was enforced in 1995 so it could be expected that from that year on wage growth in the public sector could be somewhat lower than in the private sector, as civil servants could receive more fringe benefits than private sector employees. Civil servants in the sense of this law are employees of the following institutions: ministries, the State Chancellery, the Office of The President, the Chancellery of the Riigikogu, the Office of the Chancellor of Justice, the State Audit Office, The Supreme Court of Estonia, public offices and county governments.

Civil servants are entitled to 35 calendar days of base vacation in com-parison to 28 calendar days of base vacation for other employees. Furthermore, one additional vacation day is given for the third and every additional year of service, but no more than a total of 10 days of additional vacation is given.

Once every five years, public servants have the right to study-leave for professional development, with pay, for a period of up to 3 months. Civil servants are entitled to forego repayment of the state educational loan, after graduating from an educational institution, in that every year of service is counted as repayment of one-fifth of the loan (Õppelaenu… 2004). Those studying at a state university, with at least one parent who is or was working in the public service for at least 15 years, have the right to the reimbursement of tuition fees from state budget funds. The same right is accorded to a person whose parent or spouse, while employed in the civil service becomes disabled or dies as the result of a work injury, an occupational disease or an attack made against an official in the course of duty (Õppetoetuste… 2003). Civil servants are entitled to job training financed from the general government budget, and the expenditures on training range from 2 to 4% of the wage bill of civil servants. Public servants have the right to additional state old-age pensions with the accrual of years of service. For 10–15 years the pension is increased by 10 per cent, 16–20 years of service guarantee 20 per cent additional pension, 21–25 years, 25 per cent, 26–30 years, 40 per cent and over 30 years the pension is increased by 50 per cent (Avaliku…1995). There is also better employment for civil servants in comparison to other employees as they have lengthier required notification periods for the termination of an employment contract and higher compensation in the case of a dismissal (table 2.2.3.1).

Table 2.2.3.1. Minimal compensation and notification periods in the case of dismissal

Tenure Compensation Notification period

Public service Other Public service Other less than 3 years 2 months’ salary 2 months’ salary 2 months 1 month 3–5 years 3 months’ salary 2 months’ salary 2 months 1 month 5–10 years 6 months’ salary 3 months’ salary 3 months 1 month more than 10 years 12 months’ salary 4 months’ salary 4 months 1 month Source: Avaliku teenistuse seadus, Eesti Vabariigi töölepingu seadus

Besides civil servants there are some other categories of public sector employees, who receive special fringe benefits. Pedagogues, such as teachers in public secondary, vocational, comprehensive or elementary schools and kindergartens, teaching staff at public universities and teachers in public extracurricular schools are entitle to be offered 160 hours of training each five years. These training costs are covered from the central governmental budget

Mobility between different sectors has also been relatively high in Estonia; the labour hiring and separation rates have been around 16–18% in the period from 1998–2000, but at the same time the geographic mobility of the Estonian labour force has been low. (Rõõm 2002) High inter-sectoral labour mobility could lower the monopsony power of public sector employers, which should increase wages in the public sector, but on the other hand, the low geographic mobility of labour will decrease public sector wages, especially in peripheral regions.

If private sector wages are more sensitive to cyclical fluctuations then the public-private sector may depend on economic cycles. During the early 1990s, real GDP growth in Estonia was negative, but since that time it has been positive. GDP growth peeked in 1997, but dropped in 1999 as a result of the Russian crisis. From 2000 to 2004 growth has been high and stable. If the public-private sector wage differential were counter-cyclical then it would be expected to be higher during the early transition and Russian crisis.

-15,00 -10,00 -5,00 0,00 5,00 10,00 15,00

1990 1995 2000 2005

GDP growth (%)

Figure 2.2.3.1. Real GDP growth 1991–2004 Source: Statistical Office of Estonia

Political cycles are determined by elections, and in case of Estonia there are two different types of elections: parliamentary (Riigikogu) elections and local authorities elections. There were also public presidential elections in 1992, but in latter years an election body consisting of representatives of parliament and local authorities has elected the president. But as the president in Estonia has a mainly representative task and does not have much power to influence public sector wages, then presidential elections are neglected in this article. It can be considered that parliamentary elections have a larger impact on public sector wages than local authorities’ elections, since central governmental employment has been higher than municipal employment during the entire transition period.

There were parliamentary elections in 1992, 1995, 1999 and 2003 and local authorities elections in 1993, 1996, 1999, 2002 and 2005. If public sector wages are higher in the election year then it could be expected that the public-private sector wage differential will be more positive in these years

2.2.4. Trends in public and private sector employment