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MANAGING GOVERNMENT COMPENSATION AND EMPLOYMENT—INSTITUTIONS, POLICIES, AND REFORM CHALLENGES

June 2016

IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following document has been released and is included in this package:

Informal Session to Brief: Managing Government Compensation and Employment—Institutions, Policies, and Reform Challenges

The report prepared by IMF staff and presented to the Executive Board in an informal session on May 6, 2016. Such informal sessions are used to brief Executive Directors on policy issues. No decisions are taken at these informal sessions. The views expressed in this paper are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

The document listed below has been separately released:

  • Case Studies on Managing Government Compensation and Employment—Institutions, Policies, and Reform Challenges

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Electronic copies of IMF Policy Papers are available to the public from http://www.imf.org/external/pp/ppindex.aspx

International Monetary Fund

Washington, D.C.

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MANAGING GOVERNMENT COMPENSATION AND EMPLOYMENT—INSTITUTIONS, POLICIES, AND REFORM CHALLENGES

April 8, 2016

Executive Summary

Government compensation and employment policies are important for the efficient delivery of public services which are crucial for the functioning of economies and the general prosperity of societies. On average, spending on the wage bill absorbs around one-fifth of total spending. Cross-country variation in wage spending reflects, in part, national choices about the government’s role in priority sectors, as well as variations in the level of economic development and resource constraints.

Pressures on wage spending will increase over the coming decades in many countries. Advanced economies are facing fiscal challenges associated with aging populations while also needing to reduce high public debt levels. Emerging markets and low-income countries have pressures to expand public service coverage in the context of revenue and financing constraints and the need for higher public investment.

Effective management of wage bill spending is needed to ensure that the desired public services are delivered in a cost-effective and fiscally sustainable manner. This requires adequate fiscal planning to ensure appropriate financing of the wage bill, competitive compensation to attract and retain skilled staff and incentivize performance, and the flexibility to adjust the level and composition of employment to respond efficiently to demographic and technological developments. Experience has shown that countries across all income levels have faced challenges in these areas.

Strengthening institutions is crucial for effective and sustainable wage bill management. For example, improving medium-term wage forecasting, and strengthening links between wage determination processes and fiscal frameworks, can enhance fiscal planning. Competitive compensation can be promoted through public and private sector wage comparisons. Position-based employment systems can give greater flexibility to adjust employment levels to ensure efficient service delivery.

Investing in better monitoring and information systems can greatly contribute to more effective wage bill management. The current lack of data on the level and composition of wage bill spending and employment levels reflect the precarious state of systems for monitoring and reporting wage bill spending.

Approved By

Vitor Gaspar

Prepared by a Fiscal Affairs Department (FAD) staff team led by Sanjeev Gupta and comprising David Coady, Manal Fouad, Richard Hughes, Mercedes Garcia-Escribano, Teresa Curristine, Chadi Abdallah, Kamil Dybczak, Yehenew Endegnanew, Maura Francese, Torben Hansen, La-Bhus Fah Jirasavetakul, Masahiro Nozaki, Baoping Shang, Matthew Simmonds, and Mauricio Soto. Research assistance was provided by Amyra Asamoah, Kaitlyn Douglass, Candice Liu, and Rohini Ray. Production assistance was by Liza Prado, Adam Boyd, and Ana Popovich.

Contents

  • Glossary

  • INTRODUCTION

  • TRENDS AND DRIVERS OF THE WAGE BILL

  • A. Trends

  • B. Drivers

  • MACROECONOMIC IMPLICATIONS OF WAGE BILL SPENDING

  • A. Fiscal Planning

  • B. Competitive Compensation

  • C. Efficiency and Flexibility

  • INSTITUTIONAL APPROACHES FOR EFFECTIVELY MANAGING THE WAGE BILL

  • A. Institutional Framework and Features

  • B. Institutional Features and Wage Outcomes

  • COUNTRY EXPERIENCES WITH MANAGING WAGE BILL PRESSURES

  • A. Wage Measures

  • B. Employment Measures

  • LESSONS LEARNED

  • KEY QUESTIONS

  • BOXES

  • 1. Government Wage Bill and Employment Data

  • 2. New Database on Cross Country Institutional Arrangements for Managing the Wage Bill

  • FIGURES

  • 1. General Government Wage Bill Spending

  • 2. General Government Employment

  • 3. Evolution of General Government Wage Bill

  • 4. Short-term Influences on the Government Wage Bill

  • 5. Relationship of 1 Percentage Point of GDP Increase in Government Wage Bill and the Overall Balance and its Components

  • 6. Relationship of 1 Percentage Point of GDP Increase in Government Wage Bill and the Fiscal Balance

  • 7. Public Sector Wage Premium

  • 8. Teacher-Student Ratio for Advanced Economies

  • 9. Contribution of Employment and Wages to Government Wage Bill Consolidation

  • 10. Comparative Framework: Key Institutions Influencing Wage Bill Management

  • 11. Indexation of Wages, Ceilings on Government Wages and Employment and Wage Bargaining Systems

  • 12. Institutional Features and Wage Bill Management Outcomes

  • TABLES

  • 1. Institutional Features and Wage Bill Management Outcomes

  • 2. List of Case Studies

  • 3. Measures Implemented to Rationalize the Government Wage Bill

  • REFERENCES

Glossary

AEs

Advanced Economies

EMs

Emerging Markets

FAD

Fiscal Affairs Department

GDP

Gross Domestic Product

GFS

Government Finance Statistics

ILO

International Labor Organization

IMF

International Monetary Fund

LIDCs

Low-Income Developing Countries

OECD

Organisation for Economic Co-operation and Development

PRP

Performance Related Pay

PISA

Programme for International Student Assessment

SOEs

State-Owned Enterprises

SPS

Single Pay Spine

TSRs

Teacher-Student Ratios

WEO

World Economic Outlook

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Managing Government Compensation and Employment - Institutions, Policies, and Reform Challenges
Author:
International Monetary Fund