Public Pay Policy and Its Implications for the Budget

1. 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

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

3. A. Some Concepts

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

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

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

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

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

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

10. B. International Comparisons

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

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

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

14. Government Wages as percentage of GDP

15. Average Govt. Wages as Multiple of per capita GDP

16. General Government Employment • 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.

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

18. Employment • Public Sector Employment: • State Owned Enterprises (where available) • General Government Employment: • 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

19. Employment • 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) • Progress on reform of intergovernmental finances (e.g. Central Europe) • Data accuracy a key issue in many countries

20. Government Employment

21. C. Public Pay Policy Issues

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

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

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

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

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

27. Resolving Compensation Disputes • No strike rules • Typical conflict areas/themes

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

29. D. Link With Budget Formulation, Execution and Monitoring

30. Pay Policy: Pressures & Impacts • Fiscal Pressures: • 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

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

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

33. 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 Pay More, But the Poor Pay More Dearly

34. 100% Speed 77% 75% Benefits 67% Avoid Problems Gratefulness 50% 50% 39% 36% 30% 22% 23% 25% 17% 11% 9% 6% 0% poorest third middle third richest third service. Thus the designation "gratefulness" not not imply an innocuous token of appreciation or tradition. The Rich Bribe for Speed, The Poor Bribe for Access Notes: This chart is restricted to those respondents who made unofficial payments that they felt were necessary in order to receive proper

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

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

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

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

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