Public Pay Policy and Its Implications for the

Public Pay Policy and Its Implications for the Budget Jordan Public Expenditure Review June 19, 2003 Amitabha Mukherjee Poverty Reduction and Economic Management Unit East Asia and Pacific Region, The World Bank

Public Pay Policy and Its Implications for the Budget n. Some concepts n. Civil service compensation: international comparisons n. Public pay policy issues n. Budget formulation, execution, monitoring: n. Processes and Instruments

A. Some Concepts

Civil Service Role & Size n. Based on answers to three basic questions: n. What nrole of the state n. How norganization, or structure of the public administration n. By whom ncivil service – role, composition & size (Sample references: WDR 1997; WPS 1771/1806; Kazakhstan Transition of the State Report)

Civil Service Compensation n. Elements: n. Base salary n. Allowances n. Pensions n. Other benefits n. Monetary n. Non-monetary

Civil Service Compensation n. Concepts: n. Wage adequacy n. Average Central Govt. Wage as multiple of per capita GDP n. Compression Ratios n. Transparency n. Monetization n. Competitiveness n. Fiscal sustainability n. Relativity

Civil Service: Relating Positions To Compensation n. Job description n. Job evaluation n. Job families n. Grading n. Classification of positions n. Pay policy n. Salary structure/grades/steps

Budgetary Pay & Employment Objective n To achieve a sustainable level of budgetary employment consistent with remuneration levels sufficient to attract and retain qualified personnel

Budgetary Pay & Employment Linkage with: n role and functions of the state n streamlining of central government n affordability criteria n fiscal and administrative relations between central and local governments n legal framework for budgetary employment (benefits, severance payments, pension, etc)

B. International Comparisons

Why are Government Employment and Wages comparisons tricky? Lack of reliable and recent country data n Differences in: n Methodology and classification n Concept of the State n Role and functions of different tiers of govt. n Treatment of benefits and allowances n

Wages n. Caveats: Compensation may be understated (e. g. bonuses/allowances may not be captured) n Manufacturing wages in particular, and private sector wages in general, are often understated for tax and social contribution purposes by employers and employees n

Wages Average Central Government Wages (yearly, in local currency) n Assessment of the Wage levels in relative terms n n Wage bill as % of GDP, O&M Exp. Private Sector Comparators n Average Manufacturing Wage n Average Financial Sector Wage n Average Private Sector Wage Adequacy n n Average Central Govt. Wage as multiple of per capita GDP Compression Ratios

Government Wages as percentage of GDP

Average Govt. Wages as Multiple of per capita GDP

General Government Employment n Employment in “all government departments offices, organizations and other bodies which are agencies or instruments of the central or local authorities whether accounted for or financed in, ordinary or extraordinary budgets or extra-budgetary funds. They are not solely engaged in administration but also in defense and public order, in the promotion of economic growth and in the provision of education, health, cultural and social services. ” Source: International Standard of Industrial Classification of All Economic Activities (ISIC), Series M No. 4, Rev 3 - 1990.

General Government Employment n Six categories within General Government Employment: n n n n Armed forces Civilian central government Sub-national government Health sector Education sector Police Not included: casual/seasonal/temporary employees

Employment n. Public Sector Employment: State Owned Enterprises (where available) n General Government Employment: n n n n Military Employment Central Government Employment Subnational Level Employment Education (primary & sec. school teachers) Health (Doctors, Nurses, Midwives and Nurses Assts. ) Police * (as an experiment) Expressed in nominal terms and as % of population, labor force, total employment

Employment n. Trends in employment, especially those relating to health and education, need to be seen against: Fiscal situation necessitating measures such as taking employment off budget (e. g. Armenia/Kazakhstan) n Progress on reform of intergovernmental finances (e. g. Central Europe) n n. Data accuracy a key issue in many countries

Government Employment

C. Public Pay Policy Issues

Civil Service Compensation Policy: Issues Two common issues: n Objective(s) of Pay Policy n n Are objective(s) clear? If multiple objectives, are they consistent? If not, how to reconcile? Pay Determination Mechanism including: n n Extent of Independence from Executive Extent of Collective Bargaining If Any

Civil Service Compensation Structure of Compensation n Pay Policies n Dispute Resolution n Interaction between budget cycle and pay determination cycle n

Collective Bargaining Level at which negotiations take place n Status of collective agreements n Participants in collective bargaining n Unionization level n Matters covered by collective bargaining n Indexation n Frequency of collective bargaining n

Structure of Pay Basic rates n Flexibility and relativities n Pay progression n Performance pay? n Regional pay variations n Extent of Decentralization and Its Effect(s) n

Pay Policies Policy objectives and principles n Public sector pay cost restraint n Factors in adjusting pay n Data sources n Minimum wage issues n Sector specific issues How much flexibility is appropriate? ? n

Resolving Compensation Disputes No strike rules n Typical conflict areas/themes n

Pay Determination Systems Centralized collective bargaining esp. for federal/central civil servants n Exceptions: n New Zealand: Individual contracts n France: Negotiation not official. No agreements in several years: pay was unilaterally set by Govt. n Finland: (personal agreements for c. 1000 senior CS) n Germany, Greece: CS status and pay set by law. n

D. Link With Budget Formulation, Execution and Monitoring

Pay Policy: Pressures & Impacts n Fiscal Pressures: n n n Size of wage bill Number of public sector employees Public Administration Structures Human Resource Management Legal Framework Sector-specific issues, especially in health, education, police, armed forces All of these impact poverty reduction, service delivery and growth

Impacts n Impact of pay and employment policies: n Governance and corruption problems n Access to services (see slides) n Under the table payments (see slides) n Poor quality of civil service n Inefficiency n Increases cost of service delivery

Impacts: Example – Contracting Out Health Care Services n Need for careful design and implementation: n Financing arrangements n Reporting and monitoring n Timeliness of reimbursement Realism of cost recovery arrangements n Preventing build-up of arrears n Increase in bribe levels and frequency n No change in staffing levels and staffing mix n Impact on health statistics – ‘emergencies’ n

The Rich Pay More, But the Poor Pay More Dearly median percent of household income paid in bribes (among those that paid) percent of households that reported paying bribes in the previous 12 months 33% 20% 16% 11% 8% 5% poorest third middle third richest third

The Rich Bribe for Speed, The Poor Bribe for Access 100% Speed 75% 77% Benefits Avoid Problems 67% Gratefulness 50% 39% 36% 30% 25% 22% 23% 17% 11% 6% 9% 0% poorest third middle third richest third Notes: This chart is restricted to those respondents who made unofficial payments that they felt were necessary in order to receive proper service. Thus the designation "gratefulness" not imply an innocuous token of appreciation or tradition.

Processes and Instruments n Medium Term Expenditure Framework MTEF & Budget Cycles and Human Resource Planning n Example from reading n n Linking personnel information and payroll n Human Resource Management Information System (HRMIS) n Post management n Wage bill control n Rightsizing and severance

Processes and Instruments n Estimating the fiscal impact of pay and employment adjustments: n Modeling tool to explore alternative scenarios n n Challenges: n n Mongolia, Philippines, Cambodia, West Bank/Gaza, Albania, etc Personnel data Compensation data Pensions and social security contributions The role and importance of participatory PERs n Examples: Philippines, Indian states n n Reference: PEPFMR and follow up The AAA “project cycle” – see uploaded presentation

CSR: Operational Approaches Strengthening the linkages – Thailand n ‘Efficient nucleus’ – Russia (TAMP) n Internal structural adjustment – UK/Japan n Combination of all three: n New Zealand/Australia n Kazakhstan n

CSR: Operational Approaches Personnel management systems n Addressing capacity constraints n Simplification of pay and grading structures n Internal upward feedback from inside n External feedback for measuring impact: n Feedback from public (households/firms) n Feedback from civil society and media n

Public Pay Policy and Its Implications for the Budget n. Some concepts n. Civil service compensation: international comparisons n. Public pay policy issues n. Budget formulation, execution, monitoring: n. Processes and Instruments