Wage gaps between private and public sector employees have been extensively researched. In the Nordic countries where wage formation is more regulated, these wage gaps are typically positive. Recently, the research focus has shifted towards sectoral pay gaps across regions within a single country. The results show that the private sector wage premium is higher (or public sector wage premium lower) in regions with lower unemployment rates. These differences in wage gaps are expected to determine recruitment problems in different areas. The situation is particularly worrying in an economy such as Finland where a high fraction of the workforce is employed in the public sector.
In this study we use data from the Wage Structure Statistics Survey on full-time employees in 2014–2016 to examine wage gaps between the private and local government sector. There is substantial variation in wage gaps in Finnish local labour markets, and this variation is linked with regional labour market conditions. When observable individual and plant characteristics are controlled for, the average private sector wage premium is highest in Uusimaa (6%) and lowest in South Karelia (-3%). Among men, the wage gap is positive in each region (1–10 %), whereas among women it is positive only in the Uusimaa and Pirkanmaa (1–5 %) regions and negative in all other regions (-1–4 %). We conclude that wage gaps can make it challenging for the public sector to hire and retain high quality labour especially in the Uusimaa region and among men. In an ageing economy this may be a potential concern.