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In this article we analyse the relative importance of individual ability and labour
market institutions, including public sector wage setting and trade unions, in determining earnings differences across different types of employment. To do this we use the KwaZulu-Natal Income Dynamics Study panel data from South Africa,
which show extremely large average earnings differentials across different types of
employment. Our results suggest that human capital and individual ability explain
much of the earnings differentials within the private sector, but cannot explain the
very large premiums for public sector workers.
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