Do public sector firm ownership and lack of competition matter for wages and employment? To address this question, we consider a large public‐sector company that is privatized. Using personnel records, we find employment contract liberalization to generate relative wage losses for older, high‐tenure, low‐skilled, part‐time workers, permanent residents, and women. Employment reductions mostly affect the same groups experiencing a wage decline. Overall, wage liberalization leads to an increase in wage inequality of between 6% and 9%, which—if applied to the whole public sector—would lead to a 52% to 76% closure of the “inequality gap” between the private and public sectors in Europe. Our results suggest that differences between public‐ and private‐sector wage structures found in descriptive studies are to a large extent causal rather than the result of selection into these sectors and that public sector employment and career path regulations limit a firm's ability to maintain a competitive workforce.