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Journal of Applied Economics. Vol IX, No. 2 (Nov 2006), 295-323 PUBLIC-PRIVATE PAY DIFFERENTIALS 295 PUBLIC-PRIVATE SECTOR PAY DIFFERENTIALS IN A DEVOLVED SCOTLAND AXEL HEITMUELLER* London Business School and IZA Bonn Submitted June 2004; accepted June 2005 The public-private sector wage gap in Scotland in 2000 is analysed using the extension sample of the British Household Panel Study (BHPS). Employing a switching regression model, and testing for double sample selection from the participation decision and sector choice, the wage gap is shown to be 10 % for males and 24 % for females. For males this is mainly due to differences in productive characteristics and selectivity, while for females the picture is more ambiguous. Findings also suggest that there exists a male private sector wage premium. While there is no evidence of a sample selection bias for females, the sector choice of males is systematically correlated with unobservables. Furthermore, the structural switching regression indicates that expected wage differentials between sectors are an important driving force for sectoral assignment. JEL-Classification: J71, J31, C24 Keywords: wage differentials, switching model, double sample selection, decomposition I. Introduction Devolution has brought partial political and economic independence to some regions in the United Kingdom. Prominently, Scotland is among those regions and has elected its own parliament in 1999. However, devolution has had surprisingly little impact on public sector pay setting arrangements across the country while it may have increased the relative size of the sector in devolved regions. The aim of this paper is therefore to establish whether a Scottish public s