Worker’s choice between public and private sector: Determined by public service motivation, ability and sector differences.

The last few years the discussion about high salaries in the public sector has become prominent. Some argue that to recruit highly talented people, the public sector should sometimes offer higher wages. This thesis focuses on the issue of which workers are going to work in which sector, the public or private sector. In my theoretical model this is influenced by public service motivation, base salary in the public sector, cost of effort, ability of a worker and the merit pay in the private sector. Workers are heterogeneous in two ways; they differ in public service motivation (PSM) and in ability. In this thesis I look at two different cases in the public sector: an effort-oriented case and an output-oriented case. I conclude that it doesn’t matter which orientation the workers have for their sector choice. The public sector is totally unobservable and the private sector is totally observable. Both sectors compete with each other to attract workers to produce output. The public service motivation is a wage penalty and this is caused by self-selection of the workers. In my thesis I make an indifference line for the marginal worker at which he is indifferent between working in the public and the private sector. Given this indifference line I conclude that the marginal worker his public service motivation is increasing in his talent. I also test my theoretical predications by using a Wisconsin Longitudinal Study (WLS). I found out that people in the public sector have a significant higher degree level, but after separating each degree level I came to the conclusion that people with a higher IQ score work more often in the private sector than people with a low IQ score. Furthermore, the private sector rewards a higher IQ score significantly more than the public sector. Overall the test results are in line with my theoretical predictions.