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We study the factors behind the public sector premium in Albania and Sri Lanka, the group heterogeneity in the premium, the sources of public sector wage compression, and the impact of this compression on the way individuals self-select between the public and the private sector. Similar to other countries, the public sectors in Albania and Sri Lanka pay higher wages than the private sector, for all but the most valued employees. While half of the premium of Sri Lanka and two-thirds of it in Albania are explained by differences in the occupation-education-experience mix between the sectors, and the level of private sector informality, the unexplained part of the premium is significant enough to affect the preferences of working in the public sector for different groups. We show that the compressed distributions of public sector wages and benefits create incentives for positive sorting into the public sector among most employees, and negative sorting among the most productive ones.

Is it possible for a state or a city to decouple its growth trajectory from that of its country? The answer to this question is not binary. Rather, it comes expressed in degrees that vary across places, and ultimately depends on the interaction of the factors that a sub-national unit shares with its country, and those that make it unique. On the one hand, sub-national units are generally subject to a series of country-level features that influence investment and growth patterns: the national legal framework and system of political representation, macroeconomic factors such as exchange rate regime, sovereign risk and interest rates; trade policy, labor regulations, and – in most cases – even the quality and history of institutions. On the other hand, sub-national units can exhibit stark contrasts with rest of the country in other relevant factors, like the variety and depth of know-how agglomeration they possess, the quality of diversity of its public goods, and its capacity to attract both capital and talent from outside its boundaries. Thus, the degree to which a city or state’s growth trajectory can diverge from its country’s will likely be determined by which of these set of factors is more predominant, and how these factors interact with each other.