By Yuriy Gorodnichenko and Klara Sabirianova Peter Corruption undermines the strength of public institutions and hampers economic growth and development. The cost of corruption is particularly high in developing and transition countries where bribery is endemic. We develop a framework to estimate the extent of bribery in the public sector using micro-level data on observable labor market outcomes, household spending, and asset holdings, using data from the Ukrainian Longitudinal Monitoring Survey. When bribery is widespread and exists for many years, it should appear through sectoral differences in wages and employment flows, and we can use these differences to infer the size of bribery in the economy. We find that public sector employees in Ukraine are significantly underpaid compared to workers in the private sector. The average wage gap is 24%-32%, and is largest (up to 60%) among the most productive and highly paid workers. Moreover, the gap has not diminished in 1997-2003 despite similar rates of voluntary separations and labor mobility in both sectors, the flows in and out and the virtually unchanged size of the public sector. Why do public sector employees in general, and the most productive workers in particular, continue working in the sector despite low official pay? We explore several factors that might explain why a public sector employee earns less than a private sector employee: 1. Government wage control. In an environment with three to four-digit inflation during the early 1990s this could be an important issue, however, after 1996 inflation dropped significantly and the government implemented eight revisions of the wage grid level in the public sector during 1997-2003. Despite this, the sectoral wage gap has remained large.
2. Differences in hours of work. A public sector employee, on average, works three (males) to seven (females) hours less per week than a private sector employee. However, the sectoral gap in hourly wage remains large (about 19%).
3. Fringe benefits. Workers in the public sector may accept lower wages in exchange for higher non-monetary compensation. However, the monetary value of fringe benefits per worker is larger in the private sector than in public organizations. Furthermore, the distribution of fringe benefits across the percentiles of conditional wage is practically flat in all sectors, and thus fringe benefits cannot explain the private-public wage gap that increases with the wage level.
4. Job security and risk aversion. Public sector workers may accept lower wages in exchange for higher job security and lower volatility of wages. However, the estimated sectoral differences in the probability of layoffs and reasonable values of workers' risk aversion cannot match the existing gap.
5. Other factors, such as job satisfaction, bonuses, and multiple job holding, do not seem to compensate either, and hence be traded for lower wage. The wage gap thus remains large accounting for differences in the factors above. More importantly, the large sectoral differences in wages are not translated into comparable differences in the levels of consumer expenditures and wealth. This indicates that public sector employees receive an unobserved monetary compensation — "a bribe" — that allows them to enjoy the level of consumption comparable to the consumption of workers in other sectors. In support of this argument, we also find that the gap between consumption and reported income is the largest for subsectors of public administration (including police, customs and tax authorities) and public sector managers and medical workers — groups that are commonly perceived as bribe takers and have also the greatest opportunities to extract bribes. The bribery explanation of the wage gap is consistent with other studies and media reports that portray widespread bribery in the Ukrainian public sector. For example, according to the 2002 national survey of corruption, 44% of the respondents indicated that they had paid bribes or given gifts at least once in the previous year. Ukraine is persistently at the bottom of the world distribution of the Transparency International Corruption Perceptions Index. It was ranked 69-70 among 85 surveyed countries in 1998, and 122 among 146 countries in 2004. Using the equalizing differences framework to obtain an estimate of bribery at the country level, we find that the lower bound estimate of the extent of bribery in Ukraine is between US$460 million and US$580 million, which is equivalent to 0.9-1.2% of Ukraine's GDP. Our alternative estimates suggest that the amount of bribery could have been as high as US$750 million in 2003.
Hence, at least 1% of GDP should be allocated to ensuring fair wages in the public sector. Given that the wage gap is particularly large at the top of the wage distribution, the decompression of wages in the public sector might be a necessary prescription for reducing corruption at the top levels. Although ensuring fair wages in the public sector is necessary in reducing corruption, it is not a sufficient condition and should be complemented with other measures such as increasing transparency and competition in the public sector, improving accountability and enforcement and thereby reducing the incentives and power to extract bribes. Yuriy Gorodnichenko is Ph.D. Candidate at the University of Michigan. Klara Sabirianova Peter is Assistant Professor of Economics at Georgia State University, US. The article is based on the authors' 2006 IZA Discussion Paper No. 1987 "Public Sector Pay and Corruption: Measuring Bribery from Micro Data", available at SSRN: http://ssrn.com/abstract=884322.
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