Journal Issue
Share
Chapter

Chapter 5. A Way Forward

Author(s):
Natalia Tamirisa, and Christoph Duenwald
Published Date:
January 2018
Share
  • ShareShare
Show Summary Details

Rising Challenges

The pursuit of multiple goals with public payrolls—often with limited success—has left several countries in the region with high wage bills at a time of heightened fiscal pressures. The use of public wage bill policies to influence broad socioeconomic outcomes has not achieved the desired objectives. Though other factors are also at play, countries continue to struggle with high unemployment, poverty, and inadequate service delivery. At the same time, high public payrolls have not improved public services. Furthermore, already consuming a significant portion of fiscal resources, wage bills are now weighing on fiscal sustainability amid slowing or declining fiscal revenue and economic growth due to lower oil prices and remittances.

If left unaddressed, these tensions will intensify in the coming years due to demographic changes and technological innovation. Although advanced economies and other emerging market economies will on average see negligible growth in their labor force, MENAP countries will see an annual increase of 5.5 million people in their labor forces in the next five years,1 requiring sustainable job creation and public services. Looking further ahead, with the expected flattening of the age pyramid in the civil service, the current wage bills will require even larger fiscal resources to finance rising pension liabilities. Countries in the region can step up efforts to raise revenues but reconsidering the approach to wage bill management is also a matter of increasing urgency for the region.

Reforming public wage management is already on the policy agenda of several countries in the region. In some—including the GCC, Egypt, Georgia, Iraq, the Kyrgyz Republic, and Tunisia—bringing the wage bill under control has been an important component of fiscal consolidation. In Mauritania, the government has taken steps to improve public payroll management. Several countries have implemented short-term measures designed to address pressing fiscal needs (see Tables 5.1 and 5.2 for examples).

Table 5.1.Toolbox for Public Wage Bill Management
MeasuresShort TermStructural
Compensation- Wage freezes, ceilings, or cuts

- Elimination of indexation of allowances

- Reduction of allowances
- Unifying wage structures

- Rationalizing allowances

- Introducing comparisons of public and private sector compensation

- Tightening the link between pay and performance
Employment- Hiring freezes

- Employment caps or cuts

- Attrition

- Early Retirement
- Reviewing government programs to identify understaffing and/or overstaffing

- Enhancing quality and control of payroll (e.g., payroll census and elimination of ghost workers)

- Replacing career-based employment with position-based employment for some jobs

- Public sector restructuring
Table 5.2.Middle East and Central Asia: Examples of Recent Public Wage Bill Policy Measures
Policy MeasuresShort TermStructural
Wage-Related Measures
  • Wage freezes or reductions in wages
(Egypt, Bahrain, Saudi Arabia)
  • Tightening eligibility and reducing the number and size of allowances
(Bahrain, Kuwait, Saudi Arabia)
  • Structural reforms of the compensation structure
(Armenia, Georgia)
  • Reforms tightening the link between pay and performance
(Algeria, Georgia, Saudi Arabia)
  • Expenditure review (Saudi Arabia)
Employment-Related Measures
  • Partial or selected hiring freezes
(Algeria, Djibouti, Tunisia)
  • Attrition-based employment reduction
(Algeria, Bahrain, Egypt, Iraq, Tunisia)
  • Identification and elimination of ghost workers
(Iraq, Mauritania, Saudi Arabia, Yemen)
Fiscal Planning
  • Medium-term budget incorporating measures to gradually reduce the wage bill as percent of GDP
(Algeria)
Other
  • Wage subsidies to reduce public-private wage differentials
(Bahrain, Kuwait, Saudi Arabia, United Arab Emirates)

Modernizing Public Wage Bill Management

A new approach to managing public employment and compensation would benefit the region. The proposed path forward is based on policy recommendations in IMF 2016a and analysis of regional and international experiences (Annexes 2 and 3) and in part reflects points raised by civil society organizations (Box 3) and other international organizations such as the World Bank and the International Labour Organization. To ensure an appropriate level, growth, and composition of public wage bills, four key considerations should be taken into account (Figure 5.1):

  • Ensure that public wage bill policies are fiscally sustainable. This requires evaluating the contribution of wage bills to fiscal pressures and crowding out of critical spending, identifying the key drivers of wage bills and anchoring their growth in medium-term fiscal frameworks through policy reforms. In countries where wage bills are at the core of fiscal problems, short-term measures, such as hiring and compensation freezes, can help address immediate financing pressures. However, only deeper civil service reforms and/or broader public sector restructuring can bring wage bills to sustainable levels in the medium term. These may include unifying wages, rationalizing allowances, introducing comparisons of public and private sector wages, auditing payrolls to remove ghost workers, and replacing career-based employment with position-based employment for some jobs.
  • Focus wage bill policies on providing public services effectively and equitably. Achieving this fundamental goal requires a comprehensive review and benchmarking of government programs to identify the sectoral composition of the wage bills and areas of understaffing and overstaffing. Human resource management must allow greater flexibility in reallocating employees across sectors by removing legal impediments and enhancing training, to direct resources to critical areas and improve efficiency. Public service delivery mechanisms also need to be improved, possibly through the increased use of digital technologies and e-government.
  • Strengthen institutions and data pertaining to public employment and compensation management. This includes developing transparent technocratic institutions to ensure merit-based employment selection and promotion systems (by strengthening control over hiring and allowances, linking compensation to employee performance, developing codes of conduct, and strengthening internal controls and transparency). This would help governments recruit and retain skilled high-performing staff and improve productivity while helping reduce corruption. Conducting payroll audits and building comprehensive databases of public employment and compensation can help inform human resource management. Digital technologies can also be useful in this context.
  • Sequence reforms and build synergies with other policies. The design and sequencing of wage bill reforms must be tailored to country characteristics—one size will not fit all. Steps to improve the business climate and governance frameworks, diversify the economy, create private sector jobs, and enhance the functioning of the labor market should accompany wage bill reforms. Social impact analyses should be conducted up-front—with particular attention to the impact on women—and social protection systems strengthened to smooth the transition. Mobilizing all relevant stakeholders around a long-term growth strategy will require an open dialogue between the public and private sectors, civil society, trade unions, and employer associations and clear public communications. This will help to manage expectations of public employment and explain the rationale for public wage bill reforms and their benefits—better public investment, social assistance, and improved delivery of public services.

Figure 5.1.How to Strengthen Public Wage Bill Management in the Middle East and Central Asia

Reform Options and Considerations

Ensuring Fiscal Sustainability while Improving Public Service Provision

Countries facing pressing financing needs where wage bills are at the core of fiscal problems can use fast-acting, short-term measures to reduce public payrolls. The design of such measures needs to be informed by detailed data on public wage bills as well as the analysis of their key drivers (for example, a high level of government compensation relative to the private sector, rapid expansion of government employment, or both). Country experience shows that for the effect on the fiscal position to be sustained, short-term measures (described below) will need to be followed by structural measures (Annex 3).

  • Limiting hiring: Natural attrition or, if fiscal space allows, voluntary separations or early retirement, reduce the public labor force while avoiding redundancies. Limiting new hiring has been the preferred approach in the region in response to recent fiscal worsening. Measures have varied from general hiring freezes to attrition-based programs (Algeria, Iraq, Tunisia) through which governments plan to replace 5 to 6 retiring employees with one new hire. Egypt and the Kyrgyz Republic are considering similar measures. Some economies—Algeria, Armenia, Iraq, Jordan, Tajikistan, West Bank and Gaza—have employment caps (Annex 1). Outside the region such measures were used with varying success: attrition (France, Ghana, Ireland, Kenya, Moldova, Portugal, Romania, South Africa), employment caps (France), and outright cuts (Annex 3). Some countries have exempted education, health, or other strategic sectors from limits on new hiring (Algeria, Jordan) to protect service delivery.
  • Limiting compensation growth: MENAP and CCA countries’ efforts to align public and private sector wages have included ceilings on public wages and elimination of indexation of allowances and bonuses (Egypt), streamlining of allowances and bonuses (Tunisia), and the freezing of allowances and nonwage compensation (Bahrain). Saudi Arabia launched a review of allowances for government employees. While supporting fiscal consolidation, measures limiting compensation are often partly or fully reversed by offsetting measures (Côte d’Ivoire, Jamaica, Moldova, Netherlands, Portugal, Romania, Saudi Arabia, Senegal) (Annex 3).

Structural reforms of public wage bills are necessary to ensure medium-term fiscal sustainability and improved provision of services. A comprehensive review of government programs can help identify areas of understaffing and overstaffing. It must be complemented by strategic staffing, based on objectives, job profiles and competencies, and enhanced employee mobility across sectors and their training. Formalizing informal employment in the public sector can improve planning and budgeting. Countries will need to decide on the optimal mix of civil servants and contractual employees in the context of broader civil service reforms. If public sector restructuring is needed, it may involve mergers of functions and organizations, outsourcing, privatization, and/or downsizing.2 Structural wage bill reforms require time, administrative capacity, and political will, but they generate significant and lasting savings. For example, Morocco started civil service reforms—supported by a voluntary retirement program—unsuccessfully in 2003 and with more success in 2005.3 Countries can also benefit from more targeted sectoral reviews and benchmarking, which can improve spending efficiency and delivery of specific public services (Annex 4).4

Reforms of government employment and compensation should aim to ensure competitive compensation and adaptability, which are essential for effective and equitable delivery of public services. Merit-based employment and promotion systems help governments recruit and retain skilled and high-performing staff members, raising public sector productivity. Position-based employment can be better suited than traditional career-based employment to adjust payroll over time, in response to changing demand for services, resource constraints, or technological change.5 Compensation reforms can include introducing a unified wage scale, consolidating allowances and bonuses, linking pay to employee performance, and introducing regular comparisons between public and private sector wages.6 Such reforms of government employment and compensation can help make wage bills affordable while improving public sector productivity and reducing labor market distortions (Annex 4).

Strengthening Institutions and Data

Public wage bill policies need to be firmly embedded in medium-term fiscal frameworks. Medium-term forecasting of the wage bill, budgeting, and planning would help prevent excessive economic and political procyclicality of wage bills and would provide useful guideposts for wage bill reforms. For example, in 2016, the government of Algeria prepared for the first time a medium-term budget that incorporated measures to gradually reduce the wage bill relative to GDP over the following few years. Structured wage negotiations (instead of ad hoc or continuous negotiations) and comparisons with private sector wages (instead of automatic wage indexation) would help integrate wage setting better with the budget process and medium-term fiscal frameworks.

Better data are critical for improving payroll control. Conducting a census and building a comprehensive database of government employment and compensation, paying salaries through bank accounts, and improving human resource management are among the measures that proved most successful across the world in controlling public payrolls.7 For example, better data systems help identify ghost workers and account for informal employment, eliminating waste and fraud and generating savings. Mauritania, among others, is improving control over its wage bill by removing ghost workers from the employment registers. This is also a key reform in Iraq. To get a full picture, statistics on employment and compensation in sectors that are not normally included in central government, as well as in state-owned enterprises, could be consolidated.

Transparency and strong governance are key to ensuring sustained gains and public support of wage bill reforms, as well as improved service delivery. Measures need to focus on building transparent mechanisms for public hiring, compensation setting and the overall strengthening of governance in the public sector. Ensuring adequate compensation (consistent with functions and responsibilities), institutionalization and professionalization, reducing opportunities for discretion (for example, by channeling payments through the banking system), and strengthening human resource policies and internal controls are also key elements of broader efforts to fight corruption. Improving institutional quality and accountability mechanisms, motivating public servants and providers to serve the poor and other nonprivileged populations, and empowering communities and local leaders to find local solutions can help enhance public service delivery (Brixi, Lust, and Woolcock 2015).

Sequencing Public Wage Bill Reforms

Fostering diversified private-sector-led growth is critical. The capacity of the public sector to absorb the growing labor force is increasingly limited, making private investment and job creation the only sustainable and inclusive way of addressing the persistent unemployment and low employment challenge in the region. Creating a level playing field for all businesses, improving access to finance for small and medium enterprises, promoting greater trade integration, and diversification away from oil are key components of this reform agenda and should complement public wage bill reforms. Measures that reduce skill mismatches through training and education, improve the efficiency of labor markets, and lower labor market friction (for example, make it easier to post vacancies and match them with the unemployed) also help boost the private sector and reduce unemployment (Annex 4).

Improved unemployment insurance and cash transfers can improve social outcomes and smooth the transition during public wage bill reforms. Since using public employment to reduce unemployment and distribute oil income is highly distortionary and expensive, other social policies can be used. Unemployment insurance can better address the risk of unemployment while supporting well-functioning labor markets. Developing an alternative instrument for oil income distribution would allow broader coverage and greater flexibility to adjust to oil price shocks. Similarly, social safety nets can be developed to reduce poverty and social exclusion, as well as mitigate the cost of wage bill reforms. Social impact analysis of wage bill reforms needs to be conducted up front to ensure that the reforms are designed in a socially and politically acceptable way.

Favoring efficient public investment over public employment is an effective way to create jobs and foster inclusive growth (Albino-War and others 2014). Public investment raises productivity of private investment and marginal productivity of labor, boosting the creation of quality jobs in the private sector in a lasting manner. Using savings from public wage bill reforms to increase public investment could more than offset slower growth in public employment (Annex 4).

Managing Public Wage Bills in Extraordinary Circumstances

Countries affected by conflict need to strive to maintain adequate public wage bill management. Countries affected by conflict (Iraq, Libya, Yemen) face urgent spending needs just when their revenue, financing, and administrative capacity are weakening (Rother and others 2016). In countries facing spillovers from conflicts (Jordan, Lebanon, Tunisia), large refugee flows and heightened security concerns boost demand for public services while intensifying social tensions and labor market pressures. The challenge is maintaining functioning institutions and basic services amid shrinking fiscal space. In such circumstances, wage bill pressures can be contained by reallocating employment from nonessential areas and accelerating efforts to eliminate inefficiencies (including ghost workers). Increased use of contractual employment for certain positions or sectors could help adapt to changing needs and keep costs under control. Outsourcing can reduce the burden on the state, while supporting the private sector. Shifting the policy focus to increasing private sector job creation and improving the delivery of public services for both host and refugee populations can help foster social cohesion.

1Average annual growth of the labor force over the next five years is estimated at 2.2 percent in MENAP, 0.8 percent in other emerging market economies, and 0.2 percent in advanced economies.
2An analysis of the appropriate role of the government in delivery of specific services, its size, and public sector restructuring measures is beyond the scope of this paper. Although many countries have been successful in outsourcing some services to the private sector (public transportation and other municipal services) while keeping core functions (administration, regulation) within the civil service, this may not be feasible in all countries. Countries’ choice of the mode of service delivery will have implications for the size and flexibility of public wage bills.
3The latter reform has reduced the civil service by over 7 percent, although most of the fiscal savings were eroded by wage hikes after the Arab Spring (El Massnaoui and Biygautane 2011). This underscores the importance of complementing such initiatives with reforms to foster private sector development.
4For example, in the United Arab Emirates, there may be room to improve the performance of the education system within current spending, but improving health outcomes will likely require increased spending (Annex 2).
5Career-based employment involves open competition and assessment of merit at entry; civil servants have life tenure and promotion is handled from within. Position-based employment involves open competition and entry at all levels, under fixed-term contracts or contracts for specific tasks, and promotion based on merit and performance. For more details, see IMF 2016a.
6In Georgia, for example, the authorities are preparing to adopt a remuneration law for public civil service, and in 2011 the Kyrgyz Republic consolidated allowances so that base salary represents up to 80 percent of compensation from an initial 20 percent. In Ghana, Portugal, Romania, and Zambia, reforms focused on consolidating allowances and bonuses into base pay and mapping professional categories and sectors to a common base pay (Annex 3).
7In Portugal, for example, the creation of such a database enhanced oversight and transparency, helping identify and address inefficiencies (Annex 3).

    Other Resources Citing This Publication