Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : IMF Study Explores How to Better Manage Government Pay and Employment

June 9, 2016

  • Governments under pressure to better manage their wage bills
  • Wage and hiring freezes provide only temporary relief from budget pressures
  • Structural reforms key to adjusting wage bill while protecting services

Governments should focus on delivering quality public services by effectively managing their wage bill, through adequate fiscal planning, competitive compensation, and employment flexibility, an IMF staff paper says.

Job seekers at training center in Iraq: countries need to manage their wage bills to provide quality public services through planning, competitive compensation, and flexibility (photo: Marco Di Lauro/ Stringer/Gettyimages)

Job seekers at training center in Iraq: countries need to manage their wage bills to provide quality public services through planning, competitive compensation, and flexibility (photo: Marco Di Lauro/ Stringer/Gettyimages)

Wage Bill Research

The paper, “Managing Government Compensation and Employment,” which builds on new data sets and 20 country case studies, shows that governments can accommodate changing demands and deliver high-quality public services by better managing their wage bill.

Speaking to IMF Survey, Mercedes Garcia-Escribano, Deputy Division Chief, and Teresa Rose Curristine, Senior Economist, in the IMF’s Fiscal Affairs Department, discuss ways in which governments can improve their management of pay and employment.

IMF Survey: Why is it important for governments to effectively manage their wage bill?

Garcia-Escribano: Government pay and employment policies are important for the delivery of quality public services, which are crucial for the functioning of economies and prosperity of societies. Since the wage bill is a major item in government spending (on average it represents about a quarter of the budget), its management is a priority in all countries.

The challenge is even more pressing when aging populations demand rising health and pension spending. This is the case in many advanced economies. Many emerging markets and low-income developing economies face demands for expanding access to key services, such as education and health care, to support inclusive economic growth and poverty alleviation.

IMF Survey: What can they do to improve the quality of public services while at the same time address rising wage bill pressures?

Curristine: To accommodate changing demands and deliver high-quality public services, countries need appropriate institutions to better manage their wage bill. These institutions will ensure the following:

Fiscal planning. Government wage bill increases do not result in a deterioration of the country’s fiscal position.

Compensation. Government pay and employment policies need to be competitive in order to attract and retain skilled staff and incentivize performance.

Employment flexibility. Government needs to be able to adjust employment, for example, in response to demographic and technological developments.

IMF Survey: Not an easy task?

Garcia-Escribano: That’s right. Effective wage bill management is not an easy task. Reining in wage bill spending is even more difficult before elections and during times of economic upswing. In many countries, government pay appears to be higher than in the private sector, though this may not be the case for specialized or highly trained staff. Evidence also reveals that adjusting employment levels and composition—for example, in response to changing demographics—is difficult.

Our work suggests that countries would benefit from improving medium-term wage planning, better integrating setting wages with the budget process, and more systematic wage negotiations (on an annual or multi-annual basis), as opposed to ad hoc negotiations. Regular comparisons between public and private sector pay can also enhance the ability to attract and retain staff with needed skills.

IMF Survey: What are the main reforms needed to address emerging wage bill pressures in a sustainable manner?

Curristine: Many countries have implemented reforms to address increasing wage bill pressures. We find that countries have used a range of pay and employment reforms with a heavy reliance on short-term measures, such as temporary freezes on wages or employment. While these measures might be appropriate, especially when short-term fiscal pressures are large and the wage bill is relatively high, they tend to provide only temporary relief. Structural elements are necessary for a sustained adjustment.

Countries should always design their reform strategy around their specific circumstances and after a detailed diagnostic. For example, if the diagnostic reveals that government pay is high relative to the private sector, containing wages could enhance the efficiency with little impact on the ability to attract, retain, and motivate a talented workforce. If the wage bill is deemed high because of a rapid expansion of employment, attrition measures—such as not replacing those who left voluntarily—can be effective in providing short-term relief. It is crucial to avoid disruptions in service delivery, in particular, in strategic sectors such as health care, education, or security.

IMF Survey: Is there an optimal level of spending on the government wage bill?

Garcia-Escribano: There is no optimal level of government spending on wages. In fact, there is wide variation across countries in the size of governments’ wage bill and employment levels. These variations reflect national choices about the role of government, as well as the level of economic development and the resources available. For example, Nordic countries employ 20-25 percent of their working age population in the provision of public services, whereas countries such as Australia, New Zealand, and Japan employ less than 10 percent. The picture is also mixed among emerging markets and low-income and developing countries.

In the end, what matters is that the government wage bill is effectively managed to provide quality public services and to deliver these efficiently by ensuring “value-for-money.” This is done by pursuing adequate fiscal planning, competitive compensation, and flexibility as mentioned.

IMF Survey: What advice do you have for developing countries that need to expand key public services such as education and health to support economic growth and development and poverty reduction?

Curristine: Low-income and developing countries face difficult choices: they have limited resources, and, at the same time, they need to expand the coverage of basic services, including in education and health care, to achieve the Sustainable Development Goals. They can create the needed fiscal space to expand key services by mobilizing additional revenues and improving the efficiency of their spending.

A better management of the wage bill can help them spend more efficiently. For example, governments can improve the link between payroll and personnel systems, which can reduce the occurrence of “ghost workers” (those who are on the government payroll but do not work for it). Other structural reforms can also help: countries can conduct functional reviews to identify over- or under-staffed sectors. They can also review the use of allowances and centralize wage bill management in countries with low capacity.

IMF Survey: How will the insights from the paper help to improve management of the wage bill?

Garcia-Escribano: In addition to these lessons, which are relevant for policymakers, the paper provides new data sets on government wage bill spending and employment and institutional arrangements for wage bill management. These lessons, data sets, and 20 country case studies will enrich IMF policy advice and inform our review and technical assistance work. The data sets will be made public in the coming weeks. Governments will be able to compare the size of their wage bill and employment levels with their peers.