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The authors aim to investigate public‐private pay determination using French, British and Italian micro data from the 2001 ECHP (European Community Household Panel) and estimate public/private wage differentials by country. By focussing on different countries, they exploit institutional differences to gain insights on the process of pay formation.

The authors use regression techniques to compute the pay premium both at the average and at different education/skill levels. They then decompose the observed differences into a part due to characteristics and another part due to different returns between sectors, also at different quantiles of the wage distributions within skills.

Even after controlling for observable characteristics, the authors find an overall positive wage differential for public sector workers in each of the three countries. As expected, the differential varies by skill. In general, the present findings do not fully support the view that the public (private) sector pays more (less) among the low skilled than the private (public) sector, and that the opposite is true for the highly skilled. The authors also document that the public pay premium varies as one moves up or down in the skill distribution.

On the one hand, the authors’ results confirm that the public sector acts in general as a “fair employer”, compressing pay dispersion with respect to the private sector. On the other hand, the interactions of public and private labour market institutional arrangements play a crucial role in shaping the structure of relative wages across sectors. For example, when the monopsony power in wage bargaining is relevant in both sectors as, for example, in Britain, the private sector pays in absolute value proportionally less, and also the public wage premium is smaller.

This is the first attempt to use comparable data for three countries to analyse public/private wage differences by skill levels and to link the evidence with differences in public/private wage setting regimes.

Existing research concerning the impact of unions on relative wages provides evidence for the existence of significant union/non‐union wage differentials. However, union practices are deemed to have a more pervasive effect on the overall distribution of wages, reducing wage differentials across and within establishments. Attempts to explore union effects on wage dispersion in the context of the Italian labour market. Several indicators of wage dispersion are computed, using both industry and establishment level data, in the attempt to ascertain the different routes through which union presence affects the structure of wages. The empirical evidence shows that Italian trade unions have pursued “egalitarian” objectives and have succeeded in shaping pay policies which, through central and local negotiations, raise low wages and reduce wage differentials both among skill categories and across establishments.

This paper examines the role of the bargaining regime in bringing about inter‐industry wage differentials in the Belgian private sector. Empirical findings, based on the 1995 Structure of Earnings Survey, emphasise that sectors offering high/low wages are similar for workers covered by different bargaining regimes, even when controlling for individual characteristics, working conditions and firm size. Moreover, results show that, ceteris paribus, the dispersion of inter‐industry wage differentials is higher when wages are collectively renegotiated at the firm level, and workers covered by a company collective agreement (CA) earn 5.1 per cent more than their opposite numbers whose wages are solely covered by national and/or sectoral CAs.