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Evaluating Pay & Establishment Choices

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Cross-national data can be extremely useful, but are not always the best comparators to assess civil service pay and other administrative reform operations. Local comparisons between the public and private sectors are often preferred. However, it is frequently unclear who or what those comparators should be.

Using the right comparators                                     

Public sector workers are often said to be under-paid, which could have adverse implications for morale and create the temptation to take bribes to make ends meet. On the other hand, public sector workers typically stick to their jobs, and sometimes will not resign even if offered generous separation packages. According to the first view public sector jobs are unappealing, whereas the second suggests that they are highly desirable. Either of the two views may be correct for particular groups of public sector workers, but they cannot be both true for the entire public sector. The issue is how to determine in practice whether a public sector job is under- or over-compensated.

To answer this question, the salaries and benefits of jobs in the public sector are often compared to those of similar jobs out of it. In industrial countries, the usual comparators are clerical jobs in private companies. But this comparison may not be relevant in many developing countries, where the true employment alternatives of many public sector workers are in the informal sector of the economy. Public sector jobs may be under-compensated with respect to jobs in the top formal sector companies of a developing country, but still be over-compensated with respect to the "average" job. For instance, public sector jobs may pay a low salary, but offer health coverage, annual leave, old-age pension, and other benefits.

Choosing elite private sector companies as comparators has been at the root of serious fiscal problems in some countries. These comparisons have convinced government officials, trade unions, and public opinion that public sector workers are dramatically under-paid. Through policy choices, strikes, or arbitration awards, their salaries often have been increased dramatically across the board, making the wage bill unsustainable. As a result, large downsizing operations may be needed to restore the fiscal balance, even if they are not fully justified on welfare grounds. It is thus important to supplement any comparator study with a careful analysis of earnings in and out of the public sector, using individual (or household) surveys.

Two methods can be used:

1) before versus after

If the country has had any previous downsizing operation, the change in earnings and benefits experienced by separated workers can be used to infer whether they were under-compensated or under-compensated to begin with, and by how much. The gap can be linked to a variety of individual characteristics, such as education level, work experience, region of residence, and the like. This information, in turn, makes it possible to identify the groups of public sector workers whose compensation is more out of line with the labor market. This approach requires a tracer study of separated workers.

Examples of the before versus after method include:

  • Alderman, Harold, Sudharshan Canagarajah, and Stephen Younger. 1996. "A Comparison of Ghanaian Civil Servants’ Earnings Before and After Retrenchment." Journal of African Economies 4(2): 259-288.
  • Mills, Bradford, and David Sahn. 1996. "Life after Public Sector Job Loss in Guinea." In David Sahn, ed., Economic Reform and the Poor in Africa. Clarendon Press.
  • Rama, Martín, and Donna MacIsaac. 1999. "Earnings and Welfare After Separation: Central Bank Employees in Ecuador." World Bank Economic Review 13(1): 89-116. 
  • Younger, Stephen. 1996. "Labor Market Consequences of Retrenchment for Civil Servants in Ghana." In David Sahn, ed., Economic Reform and the Poor in Africa. Clarendon Press.

2) in versus out

Earnings functions can be estimated for labor force participants outside of the public sector. These functions are among the best-established regularities in economics. They link the level of earnings with individual characteristics such as age, level of education or region of residence. This information can be used to predict the alternative earnings of public sector workers. Exercises of this sort reveal that some public sector workers could earn more out of the public sector than they earn in it. The fact that these workers do not voluntarily resign means that they value the other benefits from their jobs at least as much as the earnings they forego by sticking to them. This information can be used to infer the value of non-tangible benefits associated with public sector jobs. In practice, estimating the "rent" attached to a public sector job is the same as estimating the amount of compensation that would make the worker roughly indifferent to job separation. The in versus out approach requires access to individual records from Labor Force Surveys or from Living Standards Measurement Surveys.

The in versus out approach provides a current year value for the total rewards package. Monetary compensation is a subset of total rewards. (See Establishment Control & Pay Determination for further details.) There are nine possible elements of a total rewards package for public officials:

 

contractually-provided

non-contractual/ intangible

monetary

in-kind

current rewards

base rewards

1. base wage/salary

2. health insurance

3. job security, prestige, social privileges

allowances

4. transportation, housing, meals, telephone, travel, cost-of-living

5. transportation, housing, meals, travel

6. trips abroad, training

future expectations

7. pension

8. housing, land, etc.

9.reputation,re-employment after retirement

Examples of the in versus out method include:

  • Assaad, Ragui. 1999. "Matching Severance Payments with Worker Losses in the Egyptian Public Sector." World Bank Economic Review 13(1): 117-53. 

  • Chong, Alberto, and Martín Rama. (forthcoming). "Do Separation Packages Need To Be That Generous? Simulations for Government Employees in Guinea-Bissau." In Proceeding of the Economists’ Forum. Washington D.C.: The World Bank.

  • Lindauer, David L., and Richard H. Sabot. 1983. "The Public/Private Wage Differential in a Poor Urban Economy." Journal of Development Economics 12 (February–April): 137-152.

  • Stelcner, Morton, Jacques van der Gaag, and Wim Wijverberg. 1989. "A Switching Regression Model of Public-Private Sector Wage Differentials in Peru." Journal of Human Resources 24(3): 545-559.

  • Terrell, Katherine. 1993. "Public-Private Wage Differentials in Haiti: Do Public Servants Earn a Rent?" Journal of Development Economics 42(December): 293-314.

  • van der Gaag, Jacques, Morton Stelcner, and Wim Wijverberg. 1989. "Wage Differentials and Moonlighting by Civil Servants: Evidence from Côte d’Ivoire and Peru." World Bank Economic Review 3: 67-95.

Additional information on this topic can be found at the Shrinking Smartly website.

Assessing tradeoffs: A modeling approach to civil service pay and employment                                                           

Civil service pay and employment reform programs must be technically sound and politically feasible; and often they must be formulated quickly. Many governments currently lack the capability to design and steer these reforms successfully. They lack the analytic tools to elaborate realistic strategies and to assess costed-out policy options.

The Problem and the Limitations of Current Approaches.

In the last decade and a half, two dominant approaches have been applied to this civil service pay and employment problem. One utilizes macro-analysis to determine the appropriate size and cost for civil services. This approach uses a set of gross criteria (e.g., wage bill as percentage of GDP, per capita government employment, salary compression ratios, public-private wage comparisons), when available, to determine the nature and extent of needed reforms, such as cuts in employment or wage adjustments. These macro-criteria are "robust cartoons" that provide broad-brush guidance for reform. What they cannot supply are detailed directions for reform remedies. Reliance on these criteria has often led to over-simplified government policy and lending conditionality, with insufficient consideration of the complex tradeoffs among different sectors or levels of government, or the potential costs of introducing one or another organizational or financial management system in the public sector.

The micro- functional review represents a contrasting approach that attempts to address the limitations of macro-analysis. Functional reviews seek to determine staffing and incentive levels on the basis of the individual organizational or sectoral unit through a careful examination of the agency’s objectives, tasks, and resource capacity. However, micro-functional reviews have a downside, as well. The lack of a precise and consistent methodology has led to wide variability in the quality, and thus the utility of these exercises. At their best, they can help match organizational requirements and human resource policies for individual agencies. But functional reviews are difficult to administer and frequently take years to complete. Governments usually have difficulty aggregating functional review results into a coherent, over-arching civil service pay and employment strategy. Sometimes the micro-functional review approach allows governments to appear to be engaged in reform activities, without attacking critical path improvements or addressing the politically hard choices needed to get government working on a financially sustainable basis.

Development of A Middle-Range Analytic Tool.

A middle-range analytic tool is needed to bridge the gap between these two approaches to civil service pay and employment reform. A simulation model that can help to develop practical civil service pay and employment reform strategies could serve as an essential policy tool for governments wishing to plot a realistic civil service reform strategy. Using assumptions that can be customized to individual country circumstances and projections, the objective would be to model systematically the future civil service – the pay and employment features of an affordable and well-rewarded government in, say, five years’ time. Recent World Bank work on the design of separation packages for reducing government employment can help form the basis of assumptions about the costs of rightsizing measures (see Rama 1999 and "Shrinking Smartly"). The model would then enable specification of the reform measures that will be needed to achieve the future vision.

An early ad hoc effort to model the future civil service was undertaken in the context of Bank and DFID support for civil service reform in Zambia, Pakistan and Guyana. Initial discussions have also begun in Cambodia and Indonesia on this approach. Even in very embryonic form, the model proved very effective in laying out tradeoffs among conflicting policy objectives and the real price of potential reform initiatives. This approach is currently being piloted in a number of East Asian countries, including Cambodia and Indonesia. For a brief presentation of the model’s rationale and possible applications in the East Asian context, click here. For additional information please contact Amanda Green or Barbara Nunberg.

Other work assessing tradeoffs in civil service pay and employment reforms in Macedonia has led to the development of Employment Reduction Spreadsheet Software [both the spreadsheet and the pdf file for guidance should be downloaded by clicking on the same link]. The software is designed as a tool that Government can use to sensibly target employment reductions. Contact Gary Reid for additional information.

Recommended Readings:                  
  • Alderman, Harold, Sudharshan Canagarajah and Stephen Younger. 1996. "A Comparison of Ghanaian Civil Servants’ Earnings Before and After Retrenchment." Journal of African Economies, 4(2): 259-288.
  • Assaad, Ragui. 1999. "Matching Severance Payments with Worker Losses in the Egyptian Public Sector." World Bank Economic Review 13 (January): 117-53.
  • Assaad, Ragui: "The Effects of Public Sector Hiring and Compensation Policies on the Egyptian Labor Market.", World Bank Economic Review 11(1): 85-118.
  • Gregory, Peter. 1994. "Dealing with Redundancies in Government Employment in Ghana." In David L. Lindauer and Barbara Nunberg, eds., Rehabilitating Government: Pay and Employment Reform in Africa. Washington, D.C.: World Bank.
  • Kikeri, Sunita. 1998. "Privatization and Labor: What Happens to Workers When Governments Divest?" World Bank Technical Paper No. 396. World Bank, Washington, D.C.
  • Lachaud, Jean-Pierre. 1993. "Les écarts de salaires entre les secteurs public et privé en Afrique francophone: analyse comparative." Discussion Paper, 53. Institut International d’Etudes Sociales, Geneva.
  • Lindauer, David L., and Richard H. Sabot. 1983. "The Public/Private Wage Differential in a Poor Urban Economy." Journal of Development Economics 12 (Feb.-April): 137-152.
  • Rama, Martín. 1999. "Public Sector Downsizing: An Introduction." World Bank Economic Review 13 (January): 1-22.
  • Rama, Martín. 1997. "Efficient Public Sector Downsizing Policy Research Working Paper No. 1840 ." Development Research Group, World Bank, Washington, D.C.
  • Rama, Martín and Donna MacIsaac. 1999. "Earnings and Welfare after Downsizing: Central Bank Employees in Ecuador." World Bank Economic Review 13 (January): 89-116.
  • Robbins, Donald, Martin González Rozada, and Alicia Menéndez. 1996. "Public Sector Retrenchment and Efficient Severance Payment Schemes: A Case Study of Argentina." Paper presented at a World Bank conference on Public Sector Retrenchment and Efficient Compensation Schemes.
  • Stelcner, Morton, Jacques van der Gaag and Wim Wijverberg. 1989. "A Switching Regression Model of Public-Private Sector Wage Differentials in Peru." Journal of Human Resources, 24(3): 545-559.
  • Terrell, Katherine. 1993. "Public-Private Wage Differentials in Haiti: Do Public Servants Earn a Rent?" Journal of Development Economics 42 (December): 293-314.
  • van der Gaag, Jacques, Morton Stelcner, and Wim Wijverberg. 1989. "Wage Differentials and Moonlighting by Civil Servants: Evidence from Côte d’Ivoire and Peru." World Bank Economic Review 3: 67-95.

 

This page was prepared by Martin Rama, Barbara Nunberg, and Nazneen Barma of the World Bank.  It was submitted on 7/26/00.

 

   




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