Trends in public and private sector employment and wages

As mentioned earlier, the transition from a planned economy to a market economy will result in a decline in public sector employment and an increase in private sector employment, and Estonia is no exception in that case.

0 100 200 300 400500 600 700 800 900

1989 1991

1993 1995

1997 1999

2001 2003 Year

Employemnt (thousands)

Total Public sector Private sector

Figure 2.2.4.2. Employment in Estonia 1989–2004 Source: Statistical Office of Estonia

As can be seen from figure 2.2.4.2 there has been a remarkable drop in public sector employment, which has been larger than the rise in public sector employment, and therefore, total employment has declined during transition.

The sharpest decline in public sector employment was in 1993, when it decreased by 23%. Although public employment stabilized at the end of the period, it has declined in every single year except 2001. Throughout the entire transition period, public sector employment has dropped by 76.5%. The stabilization of public employment can be explained by the fact that the privatization process had ended by the start of the 21st century. During early

and especially in 1999, when the Russian crisis caused a recession. During recent years, private employment has slightly increased. Private sector employ-ment in 2004 was 2.16 times higher than in 1989, so it has more than doubled in 15 years. Total employment declined between 1989 and 2000, but started to rise from then on, but still it is 30% lower than in 1989. That kind of decline in employment is partly caused by the 14% decline in population during that period, but the employment rate has also decreased from 76.4% in 1989 to 59.7% in 2004. The drop in the employment rate could be caused by the decrease in labour force participation, especially among women.

The transition period is also characterized by rapid wage growth in Estonia, the nominal growth rates were especially high during the early transition period, but they were affected by a high inflation rate (figure 2.2.4.3).

0 10 20 30 40 50 60 70 80 90 100

1993 1995 1997 1999 2001 2003 2005

Wage growth (%)

Figure 2.2.4.3. Nominal wage growth in Estonia 1993–2004 Source: Statistical Office of Estonia

The dynamics of public and private sector wages has been generally quite similar, as both have increased remarkably during the transition period, but there have existed some differences in the level of wage rates according to each sector. It can be seen from figure 2.2.4.4 that at the end of the Soviet period and during early transition, wages in the private sector were higher than in the public sector. That kind of difference was largest in 1989, when the average wage in the private sector was more than double of the average wage in the public sector. By that time several new small private enterprises had recently been founded and wage levels in these firms were much higher than in the public sector. Since then, wage differences during two sectors have decreased and this kind of wage dynamics fits the theoretical U-shaped curve of productivity during transition. The kink in the wage curves at 1997 is caused by

the changes in ELFS data collection from gross wages to net wages. It has to be also kept in mind that illegal employment and tax evasion have been problems during the transition period, especially during early transition. As these problems have occurred in the private sector then actual labour income in the private sector is underestimated by both official wage statistics provided by Statistical Office of Estonia and probably also by reported wages in the ELFS.

Therefore, the wage differential calculated in this article is probably biased. The hypothesis that the public-private sector wage differential is countercyclical also finds some support, as can be seen in 1999 as a result of the Russian crisis, public sector wages were higher than private sector wages. From 2002 afterwards, Estonia has experience high GDP growth rates, and private sector wages have been higher than public sector wages.

0 500 1000 1500 2000 2500 3000 3500 4000 4500

1989 1994 1999 2004

Year

Average wage

Public Private

Figure 2.2.4.4. Average wages in the public and private sector in Estonia 1989–2004 Source: Estonian Labour Force Surveys

Differences in average wage rates indicate that there exists an unconditional wage differential between these two sectors. An unconditional public-private sector wage differential can be caused by variation in the differences in the levels of human capital, abilities and other personal characteristics between the employees in the public and private sector. As several studies conducted in other countries (e.g. Poterba and Rueben, 1994; Disney and Gosling, 1998; and Mueller, 1998) have shown, since working in the public or private sector has a different effect on an employee’s wage depending on the level of education and other personal characteristics of the employee, then it will be necessary in order to find out the “true” effect of sector choice on the wage rate, to estimate the

2.2.5. Data

The data used in this article comes from the Estonian Labour Force Surveys (ELFS), which cover wage data from 1989 to 2005. The first Estonian Labour Force Survey (ELFS) was conducted in spring 1995 and it consists of a retro-spective and current survey. The retroretro-spective part of the ELFS 95 reconstructs major labour market flows from 1989 to 1995 and wage data about 1989 and 1992–1994. The current part of the survey includes wage data about 1995. The wage data about 1989 is probably the most unreliable as it was obtained through a questionnaire survey six years after the actual time of the wage payments.

Wages from 1989 are given in roubles, whereas wages from 1992 to 2005 are given in Estonian kroons. Similar surveys were conducted in 1997 (with the retrospective section covering 1995–1996, full years), in 1998 (retrospective covering 1997) and in 1999 (retrospective covering 1998). Since 2000 the design of ELFS has changed and it has been conducted as a quarterly continuous survey.

The age limits of the sample are set at 15–74 years, but the retrospective part of ELFS 97 covers individuals aged from 15 to 69 years. ELFS is a household survey, which includes only the residents of Estonia. This means that foreign workers are not included in the sample, but this is not likely to be a problem, as the number of foreign employees has been modest Estonia during the entire transition period and furthermore very few of the foreigners in Estonia work in the public sector.

Until 1996, the ELFS contains reported data about gross wages; from 1997 net wages are reported. As the Estonian income tax system is fairly simple and proportional, gross wages could be calculated on that data. As the wage data is based one a household questionnaire survey, the wages reported here may differ from the official wage statistics based on the data from the employers, as employees may report data about unofficial or illegal employment, which does not occur in the official wage statistics. The ELFS contains data about monthly wages, but as average weekly working hours are also reported there, then it is possible to calculate the hourly wages.

The sample sizes of the ELFS vary over time. In 1995 it was 9 608 persons, 1997 5 051 persons, 1998 13 090 persons, 1999 12 703 persons. Also, the sample frames have changed over the years; the sample frame for the ELFS in 1995 was the database of the 1989 population census, for other ELFS surveys the 1997–1999 population register has been used. For ELFS 2000 the more recent survey database of the 2000 population census has been used as a sample frame. There are also differences in the sample design as stratified simple random sampling was used in the ELFS 95, cluster samples in subsequent ELFS.