Salary Caps for Public Managers and Public Sector Performance
Chiara Giannetto (University College London (UCL)); Lorenzo Incoronato (University of Naples Federico II); Edoardo Di Porto (Sapienza University of Rome); Christian Dustmann (University College London (UCL))
Abstract
This paper examines how wage caps for public sector managers influence their career trajectories and the selection of talent into public employment. We study a 2014 reform in Italy that introduced a cap on top public sector salaries, leveraging unique matched employer-employee data and an event study design. Managers of public firms affected by the cap were, on average, 10 percentage points more likely to leave for a private sector job. Those who transitioned were significantly more productive than those who remained. Manager departures also increased the likelihood that their co-workers exited public employment—particularly among high-productivity individuals. We estimate that the reform resulted in a roughly 2 percent decline in public management productivity, while reducing public employment costs by only 0.1 percent.