Controlling public sector employment

Public pay and employment policies are among the most important issues surrounding spending on general government administration, as well as wage-related spending on operation and maintenance. These policies differ considerably among countries. There can be considerable variations, even between neighbouring countries, both in growth of public employment and in salary structure - including wage differentials between skilled and unskilled workers and between public and private sectors. Not only do public pay and employment policies have important implications for the total level of public spending, they also affect the development effort in other ways:< 1. They help to determine the mix of inputs going into the production of public goods. If the wage bill is too large and other expenditure categories are relatively underfunded, too much labour will be employed relative to non-labour inputs. Complaints of teachers without textbooks, public health workers without vaccines and agricultural extension workers without fuel for their vehicles are manifestations of this problem; the crowding out of investment by an excessive wage bill is another indicator. Again, the combination of labour skills may be inefficient, as when corridors outside the offices of overworked senior administrators are full of idle messengers. Many developing countries have initiated public employment programmes to combat unemployment and this, combined with the political difficulty of dismissing civil servants, can lead to an excess of workers compared with the availability of non-labour inputs and to an excess of unskilled workers relative to skilled ones.

2. The level of compensation can affect performance. Rapid erosion in real compensation where employment is nonetheless secure can reduce work effort, because workers will turn to moonlighting, petty corruption and the pursuit of nongovernment work during official working hours to supplement their declining salaries. Maintaining staff morale and honest, efficient government under such conditions is difficult. If services decline more than proportionally to decline in wages, the unit cost of government goods and services will rise. Furthermore, many efforts to reduce the public sector wage bill, although important in helping to achieve fiscal balance, overlook the critical importance of wage differentials. Such differentials between grades are important. The severe wage compression occurring in many countries not only diminishes the incentive to work hard but also encourages better qualified staff to leave and lesser qualified staff to stay.

One consistent pattern among African countries and several other developing countries around the world is the decline both in real compensation levels - whether cash or fringe benefits - and in pay differentials between skilled and unskilled workers. Extreme cases include Ghana and Uganda, where real basic starting salaries had fallen to below subsistence level by 1983, and Sudan, where these salaries fell by four-fifths between 1970 and 1983. Many countries recognize that government pay and employment policies need reform, and some have taken steps in that direction. Possible avenues for reform are:< (a) elimination of the "ghost" or "phantom" worker - somebody who receives government wages but either does not exist or is not employed in the position for which the payment is made. This often requires a civil service census that matches payroll data with budgeted and actual employment. Efforts to eliminate "ghosts" in the Central African Republic and Guinea identified "ghost" workers at approximately 7% of civil service employment. Once "ghosts" are eliminated, payroll mechanisms need to be established so as to prevent them from materializing again.

(b) elimination of vacancies and temporary positions. Such workers are often easier and less expensive to release than permanent staff, because they possess fewer legal claims.

(c) reducing employment over time by freezing general recruitment, with some limited provision to replace essential staff, and suspension of employment guarantees. Retirements and other attrition then reduce total employment. Employment guarantees for graduates, whereby the government guarantees employment if it cannot be found elsewhere, are becoming less common, except perhaps for teacher colleges.

(d) imposing automatic retirement upon reaching retirement age or requisite years of service, or offering voluntary retirement. While reducing the total work force, such schemes provide governments with little control over who actually leaves public service and they risk losing staff they would prefer to retain. To be effective, voluntary retirement schemes also require expensive inducement mechanisms, such as severance pay.

(e) outright dismissal of redundant or (even more difficult) incompetent workers. This is difficult to apply. Severance pay for redundant workers can ease the transition, but only those workers with a legitimate claim to public employment as an acquired right, rather than a recent windfall, should be eligible. The political cost of such a programme can be eased through public education to publicize and explain the government's retrenchment plan. Such a campaign in Guinea apparently increased the public's acceptance of the austerity measure.

(f) across-the-board wage cuts, caps and freezes. These policies, sometimes combined with reduced fringe benefits, lowered transport allowances, cuts in cash leave grants and elimination of subsidized lunches, have led to virtually zero growth in wage bills; but they relieve budget pressures only temporarily if governments acquiesce to built-up wage demands when the freeze is lifted. Furthermore, because freezes are applied to the salary structure and not to individual compensation, promotions may offset intended budgetary savings.

(g) salary reforms to widen wage differentials by improving the pay of senior staff. Budgetary constraints and political pressures make such reforms difficult to implement. Nonetheless, they are clearly necessary in many cases in order to improve the overall performance of government, particularly after sustained periods of wage compression. Creating supergrades for upper management, like the senior executive service in the USA, is one way to offer higher compensation to senior government officials. Another means, as in Ghana, is to second staff to important government posts from more remunerative positions in state owned enterprises or the private sector. Such secondment is eligible for financing through a World Bank technical assistance credit.