Abstract
This paper compiles and compares recent and past measures introduced to contain the public wage bill in a number of emerging and advanced economies to assess their effectiveness in bringing down expenditure in a sustained way. In the aftermath of the financial crisis, a number of countries have approved measures on the wage bill as part of fiscal consolidation efforts. These recent episodes are compared to past cases implemented in advanced economies over the period 1979–2009. Findings suggest that public wage bill consolidation episodes pre- and post-2009 are similar in many respects. Moreover, typically countries that were able to achieve more sustained reductions in the wage bill have implemented to larger extent structural measures, and/or these measures were accompanied with substantial social dialogue and consensus.
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Notes
Throughout the paper, we use potential GDP to avoid distortions in the results due to cyclical movements in actual GDP. There are only four cases where potential GDP is not available (see Appendix Table 4): Canada (1991–1992), Denmark (1983–1984), Spain (1997), and Ireland (1982). For those we use actual GDP.
Hence, it is possible to observe countries that have taken measures but have not reduced their wage bill, i.e., the measures taken were ineffective. It is also possible that a country which has reduced the public wage bill as a share of GDP is not an episode we consider. This might happen, although unlikely, if the reduction in the wage bill as a share of GDP is due to high growth in GDP.
Guajardo et al. (2014) take only those episodes aimed at reducing the budget deficit and not those aimed at responding to cyclical conditions. They also show that their fiscal shocks based on the narrative approach tend to be more exogenous to GDP developments as compared to changes in the CAPB and therefore better suited to assess the impact of fiscal shock on economic activity, which is the main focus of their analysis.
If one country took several wage bill consolidation measures in different years, but all within a given window starting from the year of the first measure, then this is considered one episode.
In practice, many countries introduced several measures at the same time. In such cases, a country is coded as having non-structural measures if it introduced non-structural measures only—e.g., the country only introduced a wage freeze. Otherwise, if a country introduced one or more structural measures (possibly in addition to a non-structural measure such as a wage freeze), then this is coded as structural.
See Blanchard et al. (2013) for a discussion of the critical role of trust between the unions and the government in recent labor market reforms, and how it has affected the success of these reforms.
The wage bill measure used in this study is Compensation of Employees from Eurostat, which includes social contributions paid by the employer and the employees and the gross take home pay of the employee. While compensations are the right concept when analyzing fiscal adjustments, as it represents the overall cost for the budget related to public employees, it might not capture the overall adjustment on public employees if additional levies on public employees are introduced. This, for example, happened in Ireland in 2009, when an additional levy on the gross wage of public employees of 7 % on average (called Pension Related Deduction but not included in social contributions and not counted in the computation of pension benefits) was introduced.
The average reduction in the wage bill is only about 0.1 % larger for both set of episodes when the changes are computed as the maximum over the 4 years after the first year of reform (4 years is the maximum span for the recent episodes).
In the text, we focus on absolute changes, i.e., changes in the wage bill over potential GDP, and below on differences in the average public wage divided by per capita GDP and public employment over population (see Fig. 4). Results are very similar if percentage changes are considered. This implies that larger reductions in, for example, the wage bill over potential GDP are associated also with larger percentage reductions. Therefore, the analysis holds for both absolute and percentage changes. We have also replicated Fig. 3 (and Fig. 5) holding potential GDP fixed at the initial level (when measures were first introduced). While results are qualitatively similar, we observe an increase in the public wage bill as a share of the initial level of potential GDP over time. Finally, we have repeated Fig. 3 and all the subsequent analysis using actual GDP instead of potential, and we find very similar results.
Structural measures can be targeting the average wage (i.e., tightening the link between pay and performance), the employment level (i.e., outsourcing) or both (i.e., spending review). Episodes that we code as entailing structural measures often included a combination of them. Moreover, given the limited sample we work with, splitting the episodes with structural measures depending on whether they were targeting the average wage, the employment level or both would leave us with very few observations in each group. That is why we simply look at how the average wage and employment level behaves when structural measures are introduced, regardless of whether these targeted employment or the average wage.
Data on the numbers of General Government Employees are from Eurostat NACE Rev. 1.1 categories L, M and N (Public Administration and defense, Health and social work and Education, respectively). Due to data availability, for Canada and Ireland we use General Government Employment data from ILO Laborsta.
While wage bill data were available for all except one (Germany 1983–1984) of our 16 episodes, data on public employment levels are available only for 9 out of the 16 episodes.
Throughout, the Canadian government enjoyed a strong public support. However, it should be noted that the Canadian road was also long and bumpy—the first public expenditure review was initiated in the mid-1980s, but it was not until a decade later than these efforts really bore fruit. For a description of the Canadian fiscal adjustment during the 1990s, see Mauro et al. (2013).
However, when we eliminate from the sample the countries affected by the sovereign debt crisis in the euro area (Ireland, Portugal, Greece, Cyprus, Spain and Italy) the wage bill difference between countries with social dialogue and without widens, suggesting that these countries implemented large measures under market pressure regardless of whether the conditions allowed developing social dialogue. Moreover, in Ireland and Portugal general political election were held just before the inception of the adjustment program and might have fostered social dialogue. In the other countries with some social dialogue general political elections happened after the start of the fiscal adjustment (in 2010, 2012, 2011 and 2011, respectively, in Latvia, Romania, Slovenia and Spain). Further research would be needed to assess what role elections might have played in fostering the social dialogue during and after the 2008–2009 financial crisis.
See Clements et al. (2012) for estimates regarding the foreseen increase in health expenditures.
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Acknowledgments
We are very grateful to Julio Escolano and Marta Ruiz-Arranz for providing guidance, to participants in an FAD seminar for their comments, to Chris Faircloth who originally compiled the country level data for the more recent episodes and to Ethan Alt for excellent research assistance.
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Forni, L., Novta, N. Public employment and compensation reform: the role of social dialogue and structural measures. Int Tax Public Finance 23, 960–979 (2016). https://doi.org/10.1007/s10797-015-9374-z
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DOI: https://doi.org/10.1007/s10797-015-9374-z