1 Estimating Wage Differentials Between the Private, Public & Voluntary Sectors: A Three Sector Model1

A long-established literature has estimated wage differences between the public and private sectors. The apparent existence of a ‘public sector premium ’ has been the subject of much theoretical discussion. However, there is a third sector – the Voluntary sector, including charities and other nonprofit organisations – which is becoming increasingly important. Public services are regularly ‘contracted out ’ to the voluntary sector in order to reap the efficiency gains of competition and specialisation. Initial analysis suggests that voluntary sector mean wages are lower than the other two sectors, and this may be a source of some of the cost savings. The ‘Motivated Agents ’ theory suggests that workers in the voluntary sector would accept lower wages due to the ‘warm glow ’ utility of the work carried out. However, an alternative explanation is that charities may simply recruit workers with lower qualifications or experience due to a tighter binding budget constraint than the public or private sectors, and difficulties in raising capital. This study uses the British Labour Force Survey to estimate sectoral wage equations in order to investigate the magnitude and source of the apparent wage differentials. Evidence is found of a significant ‘warm glow ’ wage discount in the voluntary sector for male workers, while the picture for female workers is unclear