This study examines the predictions of the theory of incentives, under which wage that is less sensitive to level of performance or skills attracts lower quality employees, while wage that is more sensitive to these factors attracts higher quality employees. The distribution of wage in the public sector in Israel is more compressed than in the private sector (the variance of wage in the public sector is less than that of the private sector). Assuming that such a distribution rewards personal skills less than the less compressed distribution in the private sector, this study examines whether, and to what degree, it deters especially productive employees from working in the public sector. The analysis is based on an examination of employees who switched from the public sector to the private sector, and those who switched from the private sector to the public sector, in 1983-1995. The results confirm the existence of negative selection among those moving from the private sector to the public sector, and positive selection, particularly among women, among those moving in the opposite direction.

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