IMF Study Explores How to Better Manage Government Pay and Employment

IMF News, June 9, 2016

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

Purpose: Present lessons from the IMF staff paper “Managing Government Compensation and Employment,” based on new data sets and 20 country case studies, on how governments can better manage their wage bill to deliver quality public services.
Core approach recommended: adequate fiscal planning, competitive compensation, and employment flexibility.

The government wage bill is a major item in government spending: on average it represents about a quarter of the budget.
Governments face competing demands: aging populations increase health and pension spending, while many emerging markets and low-income developing economies face demands to expand access to education and health care.
Short-term measures (e.g., wage and hiring freezes) provide only temporary relief from budget pressures.
Structural reforms are necessary for sustained adjustment of the wage bill.
Cross-country variation in wage bills and employment levels is large and reflects national choices about the role of government and the level of economic development:
- Nordic countries employ 20-25 percent of their working age population in the provision of public services.
- Australia, New Zealand, and Japan employ less than 10 percent.

Strengthen institutions to ensure:
- Fiscal planning: Government wage bill increases do not result in a deterioration of the country’s fiscal position.
- Compensation: Government pay and employment policies are competitive to attract, retain, and incentivize skilled staff.
- Employment flexibility: Capacity to adjust employment in response to demographic and technological developments.
Medium-term measures to prioritize:
- Improve medium-term wage planning.
- Better integrate wage-setting with the budget process.
- Move from ad hoc negotiations to more systematic wage negotiations (annual or multi-annual).
- Regular comparisons between public and private sector pay to enhance recruitment and retention.
Design reform strategies around country-specific diagnostics:
- If government pay is high relative to the private sector, containing wages could enhance efficiency with limited impact on talent.
- If high wage bill is driven by rapid employment expansion, use attrition measures (for example, not replacing those who left voluntarily) to provide short-term relief.
- Avoid disruptions in service delivery, especially in strategic sectors such as health care, education, or security.
Use structural tools:
- Conduct functional reviews to identify over- or under-staffed sectors.
- Review the use of allowances.
- Centralize wage bill management in countries with low capacity.

Expand key public services while managing limited resources by:
- Mobilizing additional revenues.
- Improving spending efficiency.
Specific measures to improve wage bill management and efficiency:
- Improve the link between payroll and personnel systems to reduce “ghost workers” (those who are on the government payroll but do not work for it).
- Conduct functional reviews and centralize wage bill management where capacity is low.

Political economy constraints: Reining in wage bill spending is particularly difficult before elections and during economic upswings.
Public–private pay comparisons can be complex; higher public pay is not uniformly the case across all occupations (specialized or highly trained staff may differ).
Adjusting employment levels and composition is difficult in practice, despite its potential effectiveness.

The paper provides new data sets on government wage bill spending, employment, and institutional arrangements for wage bill management, and 20 country case studies.
IMF intends to use the lessons, data sets, and case studies to enrich policy advice, reviews, and technical assistance.
The data sets will be made public in the coming weeks, enabling governments to compare the size of their wage bill and employment levels with peers.

Source: IMF Survey — June 9, 2016. Interviews with Mercedes Garcia-Escribano and Teresa Rose Curristine, Fiscal Affairs Department.