Click here for search results

Resources

Aggregate Employment & Wage Bill Concerns

Governments around the world are coming under increasing pressure to do "more with less" (i.e., provide improved services while simultaneously reducing government spending). Many citizens believe that overnment’s productivity and efficiency can be improved to deliver the twin goals of greater effectiveness and improved public sector finances. Employment and pay reform within government is sometimes essential to improve public service management, service delivery and for macroeconomic stability.

Maintaining effective control over the public sector wage bill must be an ongoing task of government. As the public sector wage bill can make up a significant portion of total public sector spending, a reduction of this wage bill can be a key macroeconomic and development planning tool.  Ignoring the need for reform risks a crisis leading to hurried employment to achieve short-term financial targets  rather than long-term national development priorities. For these reasons, many developing (and developed) countries have embarked on reviews and reductions in the size of government employment.

This page provides guidance on the following issues:

  • Defining government employment

  • Measuring government employment

When do employment and pay conditions need to be reformed?

Defining government employment 

It is important to note that government employment is far from homogenous and that the civil service is a small portion of the total. For the purposes of this guide, government is defined broadly to include all levels of civilian government, the army and police force, as well as health and education sector employees. However, it does not include state-owned enterprise employees. The different terms and conditions of employment and the (changing) skills required by government should all be taken into account in designing and implementing government employment and wage reforms.

 chart

Measuring government employment                                   

Measuring the size of government sector employment can be a difficult exercise as the definition and scope of the public sector varies widely from country to country. In many countries, teachers and health workers are not treated as public servants and come under the jurisdiction of the Teaching Service or Health Service rather than the relevant ministry. Any review of public sector employment should begin with the most comprehensive measure possible. Artificially reducing the scope of the public service, for instance excluding the armed forces, risks overlooking the very areas that may be in need of reform.

          Statistics on the number of public servants should be compiled:

  1. Historically: to show how staffing patterns have changed over time
  2. By Ministry/Department: to match spending to declared priorities
  3. By cadre: to identify areas of traditional overstaffing – e.g., drivers, secretaries
  4. By salary grade: to facilitate pay reform

Data can be obtained from the following sources: payroll data, headcount exercises (see the page on Civil Service Censuses), budget documents, Auditor-General’s reports, National Accounts, and Public Expenditure Reviews. These documents are usually available from the Ministries of Finance, Planning or the employing ministries. Other important bodies can include the Central Statistics Office and Public Service Commission or their equivalents.

When do employment and pay conditions need to be reformed?
                                                                                               
There are no hard and fast metrics for deciding when to reform public sector pay and employment. The correct framework is a level of pay consistent with the operation of a motivated and professional public service at a scale the country can afford on a sustained financing basis. Comparisons with GDP and population are useful only as guides to judgment. On that very tentative basis, reformers can assess the relative size and influence of government employment and the public sector wage bill through some of the following measures:

Public sector wage bill as % of GDP: This ratio can vary between 5% and 25%, with many countries around the 10% mark. The ratio depends on the relative involvement of the state in the economy. Developing countries tend to have smaller governments relative to GDP and consequently a lower ratio.

Number of government employees as % of total population: Reformers are interested not only in the size of the wage bill but also in the number of public servants. Governments acting as an "employer of last resort" have often taken on large numbers of public servants in the lowest grades on meagre wages. These are often the most unproductive government employees, but the extent of such a problem will not be immediately apparent by examining the wage bill alone.

Number of government employees as % of total employment: This metric is similar to the preceding one, but it corrects for developing countries (especially in Africa) that have a relatively high proportion of children in the population, leading to a relatively low public servant to population ratio.

Public sector wage bill as % of total public sector spending: In order to deliver quality public services, governments will need to spend money on goods and services as well as wages and salaries. As a rule of thumb, when this ratio rises over 25%, governments risk reducing their effectiveness by squeezing non-wage expenditure such as goods and services, maintenance, and capital expenditure. In practice, this means that hospitals will lack medicines, schools will go without textbooks, etc.

Average government wages compared to per capita GDP: In order to recruit quality staff, encourage productivity and avoid corruption, governments in developing countries must pay their employees at least a living wage. This ratio provides an important indicator of whether government employees are under or over-paid in comparison to the prevailing standard of living. A larger numbers of dependants, the relative scarcity of trained labour, and low standards of living imply that this ratio will tend to be larger in developing than developed countries. However, this does not mean that government employees are over-paid.

Recruitment growth rate: When government recruitment grows faster than GDP, revenue or population growth it is clear that either financial stability (growing deficits) or future performance (through reduced wages or reduced non-wage expenditure) will be jeopardised.

Military spending: Governments that spend an inappropriate proportion of their total budget on the military sector are likely to be jeopardising future development objectives. In such situations, a country's budget might show that development related spending (on health, education, social safety nets, basic infrastructure etc.) is being crowded out by high and growing defense spending which has little justification. Countries that employ more soldiers than health and education personnel could perhaps improve their development outcomes through a reduction in military personnel expenditure. There are no hard and fast rules however, and it should be noted that the objective of the World Bank's work is not to assess military expenditure, but to assess a country's efforts in funding development expenditures. See the attached informal briefing notes - and click here for a link to the World Bank Post-Conflict Reconstruction site. You may also click here for a recent discussion of donors' roles.

These percentages or ratios should be compared to the average for the county’s region, as well as with countries at similar levels of development farther afield. It is important to note that policy recommendations cannot be "read off" the employment and wage statistics. A complete picture needs to be built up and discussed with all relevant stakeholders before designing an appropriate employment and wage reform agenda.

Key points to be kept in mind 

When reviewing public sector wages at the aggregate level, it is important to note that salary levels often vary significantly across the public sector - and particularly between the core civil service and other groups. One particular disaggregation is between skill groups - often some groups of staff are overpaid by comparison with private sector equivalents, and others underpaid. Therefore the drivers of the wage bill need careful investigation. Which groups of staff account for the larger parts of the totals - and what is the composition of their total rewards? The question of discretionary and other allowances needs some investigation in that context.

Overstaffing is a relative concept. The issue is motivation and affordability rather than staff numbers. Comparisons with GDP and population are useful only as guides to judgment.

Pensions should be considered at the same time as current year wage bill costs as the net present values of pensions can be a significant motivator. See Pension Arrangements. Pensions can act as an incentive for staff to remain in otherwise underpaid jobs. Additionally, savings from retrenchment might need to be significantly offset by the costs of continuing pension liabilities.

 

This page was prepared by Ismail Radwan of PriceWaterhouseCoopers.
It was submitted on 5/8/00.

 




Permanent URL for this page: http://go.worldbank.org/YA16JWVP60