Employment sector and pay gaps: Genetic and environmental influences

• The paper offers new evidence on public sector labour markets using data on twins.
• The variation in public sector work is primarily explained by genetic factors.
• Genetic effects are partially mediated through educational attainment.
• The OLS estimates for wage differentials are downward biased.
• Within-twin estimates indicate that wage gaps are statistically zero.

This paper uses data on Finnish twins to examine two questions regarding public sector labour markets. First, what are the genetic and environmental contributions to being a public sector employee, and second, are there wage gaps between public and private sector employees. The results indicate that 34 to 40% of the observed variance in the tendency to be a public sector employee can be attributed to genetic factors, with no influence of the shared environment. Furthermore, at least one-third of the genetic variance is mediated through educational attainment. The results from the wage gap analysis suggest that OLS estimates are downward biased. In fact, while OLS estimates indicate a negative wage gap for both males (seven per cent) and females (four per cent), the within-twin estimates do not indicate any inequalities with respect to pay offered by the two sectors.