## 1. Statistical Issues and Cross-Country Comparability

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### A. Overview
- Rightsizing personnel expenditure (“the wage bill”) is central to the reform agenda to: regain fiscal sustainability, comply with fiscal rules, and improve income distribution.
- Containing the wage bill is essential to comply with fiscal rules and ensure fiscal sustainability:
  - A 2016 constitutional amendment limits Federal government’s primary expenditure growth to the rate of inflation.
  - On average, the Federal wage bill increased by about 4 percent per year in real terms in 2000-16.
  - In subnational governments, personnel expenditure must be kept below 60 percent of net revenues (at least two States are already surpassing this level), as mandated by the fiscal responsibility law.
- Wider effects of wage bill policy:
  - Public sector wage growth can put pressure on economy-wide wages; evidence suggests Brazil’s wages have grown above productivity in recent years (Lipinsky, 2015).
  - High public compensation can crowd out skills needed for private sector competitiveness and job creation.
- Equity implications:
  - Moderating civil servants’ wage growth would be equitable; systematic government wage increases have undermined redistribution policies and slowed equality gains (Góes and Karpowicz, 2017).
  - Most government employees are in the top two quintiles of the income distribution.
- Policy implications from international experience:
  - Increases in the wage bill tend to be associated with worse fiscal outcomes and can have adverse implications for private sector employment (IMF 2016).
  - Blunt responses (wage and hiring freezes) provide temporary relief; structural reforms targeting sectors with excessive employment and wage levels, supported by strong institutions, are required for sustained adjustment while protecting service delivery.

### B. Background — Size and Composition of the Wage Bill
- Levels and shares:
  - General government compensation of employees reached 13 percent of GDP in 2016.
    - Wages and salaries: 10 percent of GDP.
    - Government’s social contributions as an employer: 3 percent of GDP.
  - In the Federal government, the wage bill is the second largest primary spending item after social security benefits.
  - In State and Municipal governments, the wage bill is nearly half of primary expenditure.
- Subnational concentration and functions:
  - Nearly 75 percent of the wage bill and 85 percent of government employment are in State and Municipal governments.
  - About 55 percent of employees in State and Municipal governments are in health, education, and security, compared to 35 percent in the Federal government.
- Federal composition:
  - Judiciary: accounting for 8 and 17 percent of the Federal government employment and wage bill, respectively.
  - Military: accounting for 28 percent and 13 percent of the Federal government employment and wage bill, respectively.
- Cross-level compensation disparities (2015):
  - Average compensation, civilians: Federal ~ R$6,000 per month; military ~ R$3,500; State officials ~ R$3,500; Municipal employees ~ R$1,900.
  - Federal employees tend to be better educated; pay differences persist controlling for schooling, with wider differences for those with high school or more.
- Variation across States (2015):
  - Wage bill as a share of State GDP ranges from 4 (São Paulo) to 20 (Roraima) percent of GDP.
  - Poorer, smaller States in the north and north-east tend to spend more on wage bill (as a share of their economy and per capita) and have higher government employment (as a share of State population).
  - The Federal District has the highest per capita wage bill.

### C. The Need for Government Wage and Employment Reform
- Recent trends:
  - Spending on compensation of employees increased by 1 percentage point of GDP in 2010-16, largely reflecting higher wage expenditure in State and Municipal governments.
  - In the Federal government, the wage bill increased in real terms over 2010-16 but remained broadly constant in percent of GDP.
- International and peer comparisons:
  - At 13 percent of GDP, Brazil’s wage bill is above comparators:
    - Advanced economies average: 10 percent of GDP.
    - Emerging economies average: 9 percent of GDP.
    - Latin America average: 8 percent of GDP.
  - Employee compensation stands at nearly 45 percent of general government revenue.
  - Adjusted for PPP (2015), Brazil’s wage bill per capita is higher than the average observed in LA5s, the LAC, the EMs and the entire sample of 158 countries.
- Federal fiscal constraint and required adjustment:
  - The constitutional rule caps Federal government’s primary expenditure growth to the rate of inflation.
  - To comply with this rule, Federal government’s expenditure must be reduced by 2.5 percentage points of GDP (from about 20 to 17.5 percent of GDP in 2017-23).
  - Required measures include:
    - A pension reform (to offset projected growth in pension spending),
    - Substantial reductions in other expenditure items,
    - Reducing the Federal government expenditure in personnel by at least 1 percentage point of GDP.
  - Complying with the rule will imply real reductions in Federal wages, a break from historical trends.
- Subnational compliance:
  - In State governments, reducing the wage bill is important to comply with the fiscal responsibility law.

### Box 1. Statistical Issues and Cross-Country Comparability
- Sources of cross-country variability in wage bills:
  - Differences in preferences regarding the role of government (e.g., public education, health, security).
  - Size and structure of federations and diseconomies of scale in small-population countries.
- Statistical coverage differences:
  - Cross-country comparisons can be affected by differences in coverage of governmental units and accounting basis (accrual vs cash).
  - Brazil reports a broad category of personnel expenses under the wage bill, including fixed and variable salaries, allowances and benefits, gratuities, overtime and personal benefits of any nature; covers the general government and excludes the SOEs.
- Inclusion of public pension deficits in Brazil’s wage bill:
  - Under GFSM 2014, when government units as employers provide social benefits directly, matching social contributions are reported in revenues and expenditures.
  - Pension system actuarial deficits are treated as spending on employees and imputed equal to the amount of social contribution needed to cover the deficit.
  - At central government level, Brazil’s wage bill as reported in the GFS includes wages and salaries, employers’ social security contributions, and imputed contributions.
  - Total contributions included in the wage bill (actual and imputed) amounted to R$93.9 bn in 2015 (1.6 percent of GDP) and correspond to compensation of “inactive” workers in the authorities’ budget.
  - Total spending on “active” workers at all government levels is estimated at 7.1 percent of GDP and closely tracks wages reported in the households’ survey (PNAD).
  - Note: There are no imputed social security contributions in States’ and Municipalities’ wage bills.

### Box 2. Subnational Wage Bill Rules and Creative Accounting
- Noncompliance and pressures:
  - In 2015, 15 out of 27 States breached the limit on personnel spending as a share of net current revenues established by the Fiscal Responsibility Law; the rest were approaching it.
  - Subnational governments were hard hit by the 2015-16 recession through a sharp decline in own revenues, in particular from ICMS taxes and oil royalties.
  - The States’ wage bill declined in real terms in 2016, but in the majority of States the wage bill remained above prudential ratios.
- Accounting practices used to circumvent personnel spending rules:
  - Under-executing spending on wages and classifying them as previous year’s expenditures (accounts payable) in the successive year.
  - Excluding items from personnel expenses, such as withholding of tax, indemnity payments, and allowances.
  - Increasing outsourcing activities which de facto shifts personnel spending to other administrative expenditures.
  - Revised single accounting system standardized information for wage bill ratios and resulted in an upward adjustment of the wage bill ratios in all States.
- Wage bill magnitude, cyclicality, and impact on investment:
  - Brazil’s wage bill is six times greater than public investment.
  - The wage bill is procyclical: in real terms, the wage bill increased on average 0.47 percentage point for a 1 percent increase in the output gap (1990-2016), above emerging market average.
  - The considerable space taken by the wage bill limits other spending, reflecting very low public investment and high personnel spending.
- Public versus private wages and premia:
  - Over the past decade, public wages increased by nearly 45 percent in real terms while private sector wages increased by about 25 percent.
  - General government employment is below 9 percent of working-age population (about in line with other emerging markets and developing countries).
  - Controlling for observable characteristics, public pay is about 30 percent higher than in the formal private sector.
  - Average markup across countries in the Luxembourg Income Study is 9 percent.
  - Public pay premia can be as high as 50 percent higher than private wages for those with fewer years of education; the premium decreases somewhat at higher educational levels.
  - The wage gap against the private sector is higher in poorer States.
  - From a lifetime-income perspective:
    - Median monthly earnings are higher for public sector workers between 20 and 64 years old in Brazil.
    - Lifetime net pension benefits are also higher in the public sector; the net transfer received by the government is particularly high for public workers.
- Distribution of government employment and pay:
  - Most government workers are in the top two quintiles of the earnings distribution: 80 percent of Federal government workers and 55 percent of State and local government workers.
  - Federal payroll (monthly data for over 580 thousand civilian employees):
    - Mean Federal earnings is about R$9,600 (median is $7,700).
    - Earnings at the 90th are 5.4 times those at the 10th percentile.
    - Over 95 percent of those in the payroll have permanent contracts.
    - The average tenure is 16 years.
  - Composition and pay levels:
    - Clerical, administrative and technical employees account for 47 percent of employment and 28 percent of the Federal government wage bill.
    - Average monthly pay examples:
      - Clerical and administrative employees: about R$5,700.
      - Professionals: R$11,600 per month.
      - High-ranking officers (management): R$23,900 per month.
- Career structure and mobility:
  - Over 130 career streams (carreira) set specific rank and pay progression and allowances; streams are often entity-specific, limiting mobility across ministries.
  - Only about one quarter of the Federal workforce is under “job groups” that allow for mobility across different entities.
- Regression and tenure effects:
  - Controlling for entity and geographical location, lower skill workers earn about 68 percent less, while those in managerial positions earn 65 percent more relative to workers in professional positions.
  - Each additional year of tenure up to 20 increases earnings by 2 percent in low-skilled positions and 3.3 in high-skilled positions; the premium for additional years of tenure disappears after 20 years.
  - Typical automatic increases of 3-4 percent for the first 10-20 years in professional posts (implying pay about 30-40 percent higher for those with 10 years of tenure compared to new entrants in comparable positions), and 1-2 percent in clerical positions.
- Performance-based bonus:
  - Federal pay includes a performance-based bonus (gratificações e bônus de desempenho) combining institutional (80 percent) and personal goals (20 percent).
  - Nearly 80 percent of the government workforce received the bonus in 2017, indicating weak differentiation.
- Federal wage differentials and compression:
  - Federal earnings vary substantially across entities and ministries even when controlling for position, tenure, and State (examples given in source).
  - Wage scales are periodically updated through agreements; example of 2015 salary accord:
    - 5.5 percent to be effective august 2016, and 5 to be effective January 2017.
    - Agreement originally covered about 70 percent of workers; adjustments were delayed and the first adjustment took place only in January 2018.
  - Over 90 percent of Federal government civilian employees receive earnings above R$3,500 (R$3,100 after tax withholding and deductions).
  - This is over 3.5 times the minimum wage and nearly equal to the average earnings that a professional could expect to earn in the private sector (PNAD 2015 average monthly wage of salaried professionals with a formal contract was R$3,200).
  - Combination of relatively high government wages for low-skilled workers, high returns to seniority, and disparate compensation by entity explain cases where clerical/administrative technical positions earn more than entry-level professionals.
- Reform constraints and near-term measures:
  - Constitution provides job stability after three years of service (Art. 41).
  - Government remuneration cannot be reduced in nominal terms (Art. 37. XV).
  - Meaningful employment reductions can mainly be achieved by attrition.
  - Near-term savings require wages to fall in real terms and employment-to-population ratio to decline.
- Illustrative fiscal example: achieving total savings of 0.5 percentage points of GDP would require freezing average remuneration in nominal terms (i.e., no negotiated wage increase) and halting new hiring for the next five years.
- Specific illustrative figures for the Federal government (2017–2022):
  - Wages and salaries spending (baseline): 2.5 2.5 2.5 2.5 2.5 2.5
  - Impact of freezing wages: -0.1 -0.2 -0.3 -0.4 -0.5
  - Impact of halting new hiring: 0.0 -0.1 -0.1 -0.1 -0.2
  - Wage bill (after measures): 2.4 2.2 2.1 2.0 1.9
- Illustrative figures for State and local governments (2017–2022):
  - Wages and salaries spending (baseline): 7.6 7.6 7.7 7.7 7.7 7.7
  - Impact of freezing wages: -0.3 -0.6 -0.9 -1.2 -1.5
  - Impact of halting new hiring: -0.1 -0.2 -0.3 -0.4 -0.5
  - Wages and salaries spending (baseline) (presented in a separate line): 7.2 6.8 6.5 6.1 5.7
- Policy directions (near-term and medium-term):
  - Contain remuneration growth:
    - Consider a multiyear agreement to maintain wage increases below the rate of inflation or differentiate negotiated increases by performance while keeping the average increase under inflation.
    - Review non-salary pay, including existing bonuses and allowances (auxílios) for Federal and subnational governments.
    - Introduce incentives to increase productivity for health care professionals at subnational level.
  - Contain employment growth:
    - Enhance workforce flexibility and target reductions to entities/positions with identified overemployment.
    - Support relocation across Federal entities.
    - In State and Municipal governments, target attrition-based policies carefully to ensure service delivery (e.g., target school districts with relatively low student-to-teacher ratios).
  - Medium-term structural reforms:
    - Simplify multiple wage grids by merging careers with overlapping wage structures.
    - Gradually realign wages with the private sector, particularly for low-skilled individuals.
    - Eliminate or greatly reduce automatic seniority increases; link increases to performance and job responsibility.
    - Design performance-related bonuses to allow better differentiation and set numerical limits for employees in each performance category.
    - Improve wage composition and transparency by limiting number and size of allowances, including setting a limit on their weight in total remuneration by individual and entity.
    - Review employment and compensation in the judiciary, recognizing legal and trust-related constraints.
- Implementation caveats and risks:
  - Unifying salary structures can push personnel costs up in the transition.
  - Setting different compensation levels for the same job during transition can complicate human resource management.
  - Legal risks can mitigate savings and reforms should be considered carefully.

### Box 3. Legislative Changes in Support of Wage Bill Reform
- Minimum wage rule:
  - The minimum wage is the lower bound for Brazilian formal sector, but the Constitution allows States to establish a wage floor above the national level.
  - The new minimum wage formula will be reviewed in 2019 and amendments can be done through an ordinary law.
  - Preserving the purchasing power of the minimum wage is the main constitutional restriction.
  - An option to condition real gains in the minimum wage to a productivity parameter is under discussion.
- Nominal wage rigidity:
  - The constitution does not allow adjusting nominal wages downward; however, there is some leeway: it is possible to adjust wages if the negotiation is made through an agreement.
  - For public employees, the Public Servants’ Law does not leave room for this interpretation.
  - In 2017, the Federal government attempted to circumvent this rigidity by:
    - increasing the pension contribution of civil servants to 14 percent (this measure was invalidated by the Supreme Court), and
    - allowing the decrease of salaries through a reduction of working hours (this measure was not approved by the Congress).
- Employment flexibility:
  - In practice it is very difficult to fire a civil servant, who becomes permanently employed after three years of service.
  - Reduction of personnel, including permanent ones, is envisaged if the wage bill rule is breached.
  - Reallocation of civil servants across ministries and careers is overly regulated, subject to approval and conditioned upon strict comparability of tasks and competencies, which hinders employment flexibility and prevents restructuring of ministries.
- Career progression rules:
  - Over 130 careers with different progression rules in the executive make the system excessively complex and hinder reallocation.
  - Entry level salaries define subsequent adjustments that are carried across ministries.
  - At the Federal level, the progression pace ranges from 12 months to 18 months.
  - Reform of careers can be tackled by altering legal texts via ordinary law or decree and the Ministry of Planning is currently working on this.
  - Changes should be coordinated across the judiciary, executive and legislative powers.
  - There is considerably more uncertainty and complexity at the subnational level.

*Source: wp18225 - 1. Statistical Issues and Cross-Country Comparability (IMF working paper content provided).*

### 1. Statistical Issues and Cross-Country Comparability_______________________________8

### 1. Statistical Issues and Cross-Country Comparability_______________________________8

### A. Overview
- Rightsizing personnel expenditure (“the wage bill”) is central to the reform agenda to: regain fiscal sustainability, comply with fiscal rules, and improve income distribution.
- Containing the wage bill is essential to comply with fiscal rules and ensure fiscal sustainability:
  - A 2016 constitutional amendment limits Federal government’s primary expenditure growth to the rate of inflation.
  - On average, the Federal wage bill increased by about 4 percent per year in real terms in 2000-16.
  - In subnational governments, personnel expenditure must be kept below 60 percent of net revenues (at least two States are already surpassing this level), as mandated by the fiscal responsibility law.
- Wider effects of wage bill policy:
  - Public sector wage growth can put pressure on economy-wide wages; evidence suggests Brazil’s wages have grown above productivity in recent years (Lipinsky, 2015).
  - High public compensation can crowd out skills needed for private sector competitiveness and job creation.
- Equity implications:
  - Moderating civil servants’ wage growth would be equitable; systematic government wage increases have undermined redistribution policies and slowed equality gains (Góes and Karpowicz, 2017).
  - Most government employees are in the top two quintiles of the income distribution.
- Policy implications from international experience:
  - Increases in the wage bill tend to be associated with worse fiscal outcomes and can have adverse implications for private sector employment (IMF 2016).
  - Blunt responses (wage and hiring freezes) provide temporary relief; structural reforms targeting sectors with excessive employment and wage levels, supported by strong institutions, are required for sustained adjustment while protecting service delivery.

### B. Background — Size and Composition of the Wage Bill
- General government compensation of employees reached 13 percent of GDP in 2016.
  - Wages and salaries: 10 percent of GDP.
  - Government’s social contributions as an employer: 3 percent of GDP.
- Role of the wage bill in government spending:
  - In the Federal government, the wage bill is the second largest primary spending item after social security benefits.
  - In State and Municipal governments, the wage bill is nearly half of primary expenditure.
- Subnational share and functions:
  - Nearly 75 percent of the wage bill and 85 percent of government employment are in State and Municipal governments.
  - About 55 percent of employees in State and Municipal governments are in health, education, and security, compared to 35 percent in the Federal government.
  - The Federal government includes:
    - Judiciary: accounting for 8 and 17 percent of the Federal government employment and wage bill, respectively.
    - Military: accounting for 28 percent and 13 percent of the Federal government employment and wage bill, respectively.
- Cross-level compensation disparities (2015):
  - Average compensation, civilians: Federal ~ R$6,000 per month; military ~ R$3,500; State officials ~ R$3,500; Municipal employees ~ R$1,900.
  - Federal employees tend to be better educated; pay differences persist controlling for schooling, with wider differences for those with high school or more.
- Variation across States (2015):
  - Wage bill as a share of State GDP ranges from 4 (São Paulo) to 20 (Roraima) percent of GDP.
  - Poorer, smaller States in the north and north-east tend to spend more on wage bill (as a share of their economy and per capita) and have higher government employment (as a share of State population).
  - The Federal District has the highest per capita wage bill.

### C. The Need for Government Wage and Employment Reform
- Recent trends:
  - Spending on compensation of employees increased by 1 percentage point of GDP in 2010-16, largely reflecting higher wage expenditure in State and Municipal governments.
  - In the Federal government, the wage bill increased in real terms over 2010-16 but remained broadly constant in percent of GDP.
- International and peer comparisons:
  - At 13 percent of GDP, Brazil’s wage bill is above comparators:
    - Advanced economies average: 10 percent of GDP.
    - Emerging economies average: 9 percent of GDP.
    - Latin America average: 8 percent of GDP.
  - Employee compensation stands at nearly 45 percent of general government revenue, higher than advanced and emerging economies.
  - Adjusted for PPP (2015), Brazil’s wage bill per capita is higher than the average observed in LA5s, the LAC, the EMs and the entire sample of 158 countries.
- Federal fiscal constraint and required adjustment:
  - The constitutional rule caps Federal government’s primary expenditure growth to the rate of inflation.
  - To comply with this rule, Federal government’s expenditure must be reduced by 2.5 percentage points of GDP (from about 20 to 17.5 percent of GDP in 2017-23).
  - This requires:
    - A pension reform (to offset projected growth in pension spending),
    - Substantial reductions in other expenditure items,
    - Reducing the Federal government expenditure in personnel by at least 1 percentage point of GDP.
  - Such adjustment implies a break from historical trends—the Federal wage bill has traditionally increased in real terms, and complying with the rule will imply real reductions.
- Subnational compliance:
  - In State governments, reducing the wage bill is important to comply with the fiscal responsibility law (see Box 2 referenced in source).

### Box 1. Statistical Issues and Cross-Country Comparability
- Cross-country variability in wage bills reflects:
  - Differences in preferences regarding the role of government (e.g., public education, health, security drive higher numbers of teachers, police, health professionals).
  - Size and structure of federations and diseconomies of scale in small-population countries.
- Statistical coverage differences:
  - Cross-country comparisons can be affected by differences in coverage of governmental units and accounting basis (accrual vs cash).
  - Brazil reports a broad category of personnel expenses under the wage bill, including fixed and variable salaries, allowances and benefits, gratuities, overtime and personal benefits of any nature; covers the general government and excludes the SOEs.
- Inclusion of public pension deficits in Brazil’s wage bill:
  - According to GFSM 2014, when government units as employers provide social benefits directly, matching social contributions are reported in revenues and expenditures.
  - Pension system actuarial deficits are treated as spending on employees and imputed equal to the amount of social contribution needed to cover the deficit.
  - At central government level, Brazil’s wage bill as reported in the GFS includes wages and salaries, employers’ social security contributions, and imputed contributions.
  - Total contributions included in the wage bill (actual and imputed) amounted to R$93.9 bn in 2015 (1.6 percent of GDP) and correspond to compensation of “inactive” workers in the authorities’ budget.
  - Total spending on “active” workers at all government levels is estimated at 7.1 percent of GDP and closely tracks wages reported in the households’ survey (PNAD).
  - Note: There are no imputed social security contributions in States’ and Municipalities’ wage bills.

*Source: wp18225 - 1. Statistical Issues and Cross-Country Comparability_______________________________8 (IMF working paper content provided).*

### Box 2. Subnational Wage Bill Rules and Creative Accounting

### Box 2. Subnational Wage Bill Rules and Creative Accounting

### Noncompliance with wage bill rules and creative accounting
- In 2015 already, 15 out of 27 States breached the limit on personnel spending as a share of net current revenues established by the Fiscal Responsibility Law; the rest were approaching it.
- Subnational governments were hard hit by the 2015-16 recession through a sharp decline in own revenues, in particular from ICMS taxes and oil royalties.
- The States’ wage bill declined in real terms in 2016, but in the majority of States the wage bill remained above prudential ratios.
- Accounting practices used to circumvent personnel spending rules:
  - Under-executing spending on wages and classifying them as previous year’s expenditures (accounts payable) in the successive year.
  - Excluding items from personnel expenses, such as withholding of tax, indemnity payments, and allowances.
  - Increasing outsourcing activities which de facto shifts personnel spending to other administrative expenditures.
- States’ own auditors sanctioned these accounting gimmicks; as part of PAF monitoring (first agreed with Rio de Janeiro), the Treasury established a single accounting system standardizing information for wage bill ratios. The revised methodology resulted in an upward adjustment of the wage bill ratios in all States.

### Wage bill magnitude, cyclicality, and impact on investment
- Brazil’s wage bill is six times greater than public investment.
- The wage bill is procyclical: in real terms, the wage bill increased on average 0.47 percentage point for a 1 percent increase in the output gap (1990-2016), above emerging market average.
- The considerable space taken by the wage bill limits other spending, reflecting very low public investment and high personnel spending.

### Public versus private wages and wage premia
- Over the past decade, public wages increased by nearly 45 percent in real terms while private sector wages increased by about 25 percent.
- Brazil’s general government employment is about in line with those observed in other emerging markets and developing countries (below 9 percent of working-age population), albeit slightly higher than in other Latin American economies.
- Controlling for observable characteristics, public pay is about 30 percent higher than in the formal private sector.
- Average markup across countries in the Luxembourg Income Study is 9 percent (comparison point in text).
- Public pay premia can be as high as 50 percent higher than private wages for those with fewer years of education; the premium decreases somewhat at higher educational levels.
- The wage gap against the private sector is higher in poorer States.
- From a lifetime-income perspective:
  - Median monthly earnings are higher for public sector workers between 20 and 64 years old in Brazil.
  - Lifetime net pension benefits are also higher in the public sector; the net transfer received by the government is particularly high for public workers, implying a high internal rate of return of their pensions.

### Distribution of government employment and pay
- Most government workers are in the top two quintiles of the earnings distribution: 80 percent of Federal government workers and 55 percent of State and local government workers.
- Federal payroll (monthly data for over 580 thousand civilian employees):
  - Mean Federal earnings is about R$9,600 (median is $7,700).
  - Earnings at the 90th are 5.4 times those at the 10th percentile.
  - Over 95 percent of those in the payroll have permanent contracts.
  - The average tenure is 16 years.
- Composition and pay levels:
  - Clerical, administrative and technical employees account for 47 percent of employment and 28 percent of the Federal government wage bill.
  - Average monthly pay examples:
    - Clerical and administrative employees: about R$5,700.
    - Professionals: R$11,600 per month.
    - High-ranking officers (management): R$23,900 per month.
- Career structure and mobility:
  - Over 130 career streams (carreira) set specific rank and pay progression and allowances; streams are often entity-specific, limiting mobility across ministries.
  - Only about one quarter of the Federal workforce is under “job groups” that allow for mobility across different entities.
- Regression and tenure effects:
  - Controlling for entity and geographical location, lower skill workers earn about 68 percent less, while those in managerial positions earn 65 percent more relative to workers in professional positions.
  - Each additional year of tenure up to 20 increases earnings by 2 percent in low-skilled positions and 3.3 in high-skilled positions; the premium for additional years of tenure disappears after 20 years.
  - Typical automatic increases of 3-4 percent for the first 10-20 years in professional posts (implying pay about 30-40 percent higher for those with 10 years of tenure compared to new entrants in comparable positions), and 1-2 percent in clerical positions.
- Performance-based bonus:
  - Federal pay includes a performance-based bonus (gratificações e bônus de desempenho) combining institutional (80 percent) and personal goals (20 percent).
  - Nearly 80 percent of the government workforce received the bonus in 2017, indicating weak differentiation.

### Federal wage differentials and wage compression
- Federal earnings vary substantially across entities and ministries even when controlling for position, tenure, and State; examples given:
  - A motorist in the Ministry of Energy earns about 30 percent more than in the rest of the Federal government.
  - A telephone operator in the Ministry of Transportation earns 53 percent more than in the rest of the Federal government.
- Wage scales are periodically updated through agreements; example of 2015 salary accord:
  - 5.5 percent to be effective august 2016, and 5 to be effective January 2017.
  - Agreement originally covered about 70 percent of workers; adjustments were delayed and the first adjustment took place only in January 2018.
- Wage compression and distortions:
  - Over 90 percent of Federal government civilian employees receive earnings above R$3,500 (R$3,100 after tax withholding and deductions).
  - This is over 3.5 times the minimum wage and nearly equal to the average earnings that a professional could expect to earn in the private sector (PNAD 2015 average monthly wage of salaried professionals with a formal contract was R$3,200).
  - Combination of relatively high government wages for low-skilled workers, high returns to seniority, and disparate compensation by entity explain cases where clerical/administrative technical positions earn more than entry-level professionals.

### Reform options and illustrative fiscal scenarios
- Institutional constraints:
  - Constitution provides job stability after three years of service (Art. 41).
  - Government remuneration cannot be reduced in nominal terms (Art. 37. XV).
  - Meaningful employment reductions can mainly be achieved by attrition.
- Near-term savings require wages to fall in real terms and employment-to-population ratio to decline.
- Illustrative fiscal example: achieving total savings of 0.5 percentage points of GDP would require freezing average remuneration in nominal terms (i.e., no negotiated wage increase) and halting new hiring for the next five years.
- Specific illustrative figures for the Federal government (2017–2022):
  - Wages and salaries spending (baseline): 2.5 2.5 2.5 2.5 2.5 2.5
  - Impact of freezing wages: -0.1 -0.2 -0.3 -0.4 -0.5
  - Impact of halting new hiring: 0.0 -0.1 -0.1 -0.1 -0.2
  - Wage bill (after measures): 2.4 2.2 2.1 2.0 1.9
- Illustrative figures for State and local governments (2017–2022) as presented:
  - Wages and salaries spending (baseline): 7.6 7.6 7.7 7.7 7.7 7.7
  - Impact of freezing wages: -0.3 -0.6 -0.9 -1.2 -1.5
  - Impact of halting new hiring: -0.1 -0.2 -0.3 -0.4 -0.5
  - Wages and salaries spending (baseline) (presented in a separate line): 7.2 6.8 6.5 6.1 5.7
- Policy directions (near-term and medium-term):
  - Contain remuneration growth:
    - Consider a multiyear agreement to maintain wage increases below the rate of inflation or differentiate negotiated increases by performance while keeping the average increase under inflation.
    - Review non-salary pay, including existing bonuses and allowances (auxílios) for Federal and subnational governments.
    - Introduce incentives to increase productivity for health care professionals at subnational level.
  - Contain employment growth:
    - Enhance workforce flexibility and target reductions to entities/positions with identified overemployment.
    - Support relocation across Federal entities.
    - In State and Municipal governments, target attrition-based policies carefully to ensure service delivery (e.g., target school districts with relatively low student-to-teacher ratios).
  - Medium-term structural reforms:
    - Simplify multiple wage grids by merging careers with overlapping wage structures.
    - Gradually realign wages with the private sector, particularly for low-skilled individuals.
    - Eliminate or greatly reduce automatic seniority increases; link increases to performance and job responsibility.
    - Design performance-related bonuses to allow better differentiation and set numerical limits for employees in each performance category.
    - Improve wage composition and transparency by limiting number and size of allowances, including setting a limit on their weight in total remuneration by individual and entity.
    - Review employment and compensation in the judiciary, recognizing legal and trust-related constraints.
- Implementation caveats and risks:
  - Unifying salary structures can push personnel costs up in the transition.
  - Setting different compensation levels for the same job during transition can complicate human resource management.
  - Legal risks can mitigate savings and reforms should be considered carefully.

*Source: IMF staff calculations and analysis in Box 2 of the provided PDF content.*

### Box 3. Legislative Changes in Support of Wage Bill Reform

### Box 3. Legislative Changes in Support of Wage Bill Reform

### Minimum wage rule
- The minimum wage is the lower bound for Brazilian formal sector, but the Constitution allows States to establish a wage floor above the national level.
- The new minimum wage formula will be reviewed in 2019 and amendments can be done through an ordinary law.
- Preserving the purchasing power of the minimum wage is the main constitutional restriction.
- An option to condition real gains in the minimum wage to a productivity parameter is under discussion.

### Nominal wage rigidity
- The constitution does not allow adjusting nominal wages downward; however, there is some leeway: it is possible to adjust wages if the negotiation is made through an agreement.
- For public employees, the Public Servants’ Law does not leave room for this interpretation.
- In 2017, the Federal government attempted to circumvent this rigidity by:
  - increasing the pension contribution of civil servants to 14 percent (this measure was invalidated by the Supreme Court), and
  - allowing the decrease of salaries through a reduction of working hours (this measure was not approved by the Congress).

### Employment flexibility
- In practice it is very difficult to fire a civil servant, who becomes permanently employed after three years of service.
- Reduction of personnel, including permanent ones, is envisaged if the wage bill rule is breached.
- This rule has not been binding at the FG level (Appendix, Table 1).
- Reallocation of civil servants across ministries and careers is overly regulated, subject to approval and conditioned upon strict comparability of tasks and competencies, which hinders employment flexibility and prevents restructuring of ministries.

### Career progression rules
- Over 130 careers with different progression rules in the executive make the system excessively complex and hinder reallocation.
- Entry level salaries define subsequent adjustments that are carried across ministries.
- At the Federal level, the progression pace ranges from 12 months to 18 months.
- Reform of careers can be tackled by altering legal texts via ordinary law or decree and the Ministry of Planning is currently working on this.
- Changes should be coordinated across the judiciary, executive and legislative powers.
- There is considerably more uncertainty and complexity at the subnational level (See Table 2 in Appendix).

*Source: wp18225 - Box 3. Legislative Changes in Support of Wage Bill Reform*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18225.pdf_