Changes in the Distribution of Wages, 1940-1950: The Public vs. the Private Sector

Between 1940 and 1950 wage differentials within and between labor market groups narrowed significantly - the so-called 'Great Compression'. This paper disaggregates the Great Compression into its public and private components. Wage compression in the public sector, along with a decline in the pay premia received by public sector workers, explains about 40 percent of aggregate wage compression in the 1940s. The experience of the 1940s stands in stark contrast with that of the past two decades, in which a rigid public sector wage structure has dampened increases in aggregate wage inequality.