Although public sector unionism is growing throughout the industri-
alized nations, and there is widespread interest in the question of how
such labour markets operate, little theoretical work has been done on
these problems. The paper develops a two sector general equilibrium
model in which a government and a public sector union together negotiate
an efficient contract. Public sector wages turn out to be sticky com-
pared to those in the private sector, and there is over—employment in
the publicly run half of the economy. The model's features are rather
different from those in the private contract literature. Extensions
of the model to include union—run insurance, endogenous membership,
missing capital markets and public goods are also considered.

This paper performs a longitudinal comparison of public and
private sector pay. Although not decisive because of small sample
sizes, the results tend to corroborate the conclusions of previous
cross-sectional studies. Specifically, I find that on average
wages of federal workers exceed those of private sector workers by
10% to 25%, while wages of state and local government workers are
roughly equivalent to or slightly less than the wages of private
sector workers. Furthermore, these conclusions hold for a sample
of workers who joined the government after being involuntarily
displaced from their private sector jobs. In addition, a
comparative analysis of the length of job queues suggests that on
average more workers apply for job openings in the federal
government than in the private sector.
Finally, both longitudinal and cross-sectional analyses support
the conclusion that the union wage gap is substantially smaller in
the public sector than in the private sector.