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Controlling Compensation

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Controlling Compensation (OECD and IMF)

Summary Advice (OECD): While important gains can be achieved through management and pay reforms, reducing the public sector wage bill is a candidate for fiscal consolidation in many countries.

Summary Advice (IMF)The IMF advices that public wage bill reforms should target structural changes that strengthen the link between pay and productivity, improve hiring processes, and ultimately raise efficiency in the provision of public services. They should also be coordinated with reforms in other areas, especially in the labor-intensive health and education sectors, to ensure objectives are aligned. In emerging market and developing economies, further increases in the wage bill should be commensurate with the provision of services and growth of the fiscal space.

Main Points (OECD):

On average, the general government wage bill is close to 10% of GDP and accounts for roughly one quarter of overall spending, which will include health and education spending to varying extents across countries. Indeed, there are countries where a large public-private sector wage gap has developed over time. Restoring the relativities that existed in the early 2000s could yield significant savings in a number of countries. Ireland and Hungary have demonstrated recently that substantial cuts in public sector wages can be implemented if there is an urgent need for consolidation and a case arising from public-private pay relativities. That said, comparing public and private remuneration levels poses serious challenges, and requires valuation of working conditions and non-wage remuneration, such as defined benefit pension schemes. The ultimate test of adequacy is likely to be the difficulty or ease of recruitment into and retention in the civil service. From this perspective, budgetary savings achievable through reductions in the government wage bill should best be the outcome of a thorough review rather than across-the-board or arbitrary cuts in pay.

Main Points (IMF):  

  • The reduction of the government wage bill has been larger and more durable when the adjustment included structural measures, as such measures often permanently improved the efficiency of the wage formation and hiring processes or the range of services provided, or both. Social dialogue and public support for reform has also been an important factor for success, allowing policymakers to introduce more fundamental reforms or sustain temporary measures over a longer period. Alternatively,reforms with little social dialogue may well unravel after a few years. To be sure, these results may also apply to other spending reforms.
  • Downsizing that is part of a reorganization of government services and that targets specific positions and functions is likely to be more successful in achieving permanent reductions in employment than an untargeted, across-the-board cut in employment. The literature on civil service reform also suggests that voluntary departure schemes have not been very effective, as they suffer from adverse selection problems (Haltiwanger and Singh, 1999; OECD, 2011; Holzman and others, 2011).
  • Reforms to public sector wages and employment can generate substantial savings and bolster long term growth, particularly where public sector wages (adjusted for differences in human capital) are higher than those prevailing in the private sector, or the size of public employment is disproportionate to the services provided to the economy. An overblown and poorly managed public sector can result in sizable inefficiencies and crowd out private sector employment (Algan, Cahuc, and Zylberberg, 2002; Behar and Mok, 2013). Whether reforms should focus on wage levels and their dispersion or on employment depends on a country’s starting point. Countries with high public wage premiums vis-àvis the private sector might want to correct wages first, and countries with large (and maybe relatively poorly paid) staffs might consider reorganizing and streamlining the provision of services.
  • Regardless of whether the immediate goal is to contain the growth of the wage bill or to create the fiscal space to accommodate a larger one, an important challenge is to attract the necessary staff to ensure that public services are provided in an efficient manner. Increasing the link between pay increases and employeeor team performance and periodically reassessing employment levels in line with the functions of the government should ensure retention of skills while improving efficiency.

Source: OECD (2012). OECD, "Fiscal consolidation: How much, how fast and by what means?" OECD Economic Policy Papers No. 1, at (accessed 28 April 2014) and IMF (2014). IMF, “Public Expenditure Reform: Making Difficult Choices” IMF Fiscal Monitor, at (accessed 25 April 2014).

Page Created By: Matthew Seddon on 28 April 2014. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

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