DP5585 Public Sector Pay and Corruption: Measuring Bribery from Micro Data

Author(s): Yuriy Gorodnichenko , Klara Sabirianova

Publication Date: March 2006

Keyword(s): wage , wage differentials , public sector , corruption , bribery , Ukraine

JEL(s): J3 , J4 , O1 , P2

Programme Areas: Institutions and Economic Performance , Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP5585.asp

This study is the first to provide a systematic measure of bribery using micro-level data on reported earnings, household spending and asset holdings. We use the compensating differential framework and the estimated sectoral gap in reported earnings and expenditures to identify the size of unobserved (unofficial) compensation (i.e., bribes) of public sector employees. In the case of Ukraine, we find that public sector employees receive 24-32% less wages than their private sector counterparts. The gap is particularly large at the top of the wage distribution. At the same time, workers in both sectors have essentially identical level of consumer expenditures and asset holdings that unambiguously indicate the presence of non-reported compensation in the public sector. Using the conditions of labour market equilibrium, we develop an aggregate measure of bribery and find that the lower bound estimate of the extent of bribery in Ukraine is between 460m and 580m U.S. dollars (0.9-1.2% of Ukraine’s GDP in 2003).