Pay Reforms across the OECD

Dominique MeursUniversity Paris Ouest Nanterre la Defense

Outline

• Similar responses to the budgetary crisis in European countries : pay freezes, pay cuts, reduction of public service staff numbers

• Diversity of pay reforms in the past 20 years

• Performance Related Payment : Much Ado about Nothing?

Similar responses to the budgetary crisis

How to reduce the public wage bill?

Wages: cuts, freezes, etc.

Employment : downsizing of the public sector

Pensions

Public sector: pay freezes, pay cuts Annual collectively agreed pay in the civil service

0% Pay cuts

20102011

• Regional Pay Differentials: depend on the degree of centralisation of public pay settlement, differences in regional costs of living and local private wage dynamics. Pay cuts/freezes may increase these differences and have adverse effects on labour market functioning.

• Examples:France: same nominal public pay grid across regions => differences in real public wages (Paris compared with the rest of France).Italy and Spain: high regional heterogeneity. Spain: general wage reduction for all public employees + additional wage cuts by some Autonomous Regions. Italy: national + local bargaining since 1993, but huge regional pay differences. Pressure from BCE to decentralise more (2011).UK: objective to implement local/regional pay to reduce public wage premium.Germany: increasing differences in annual wages between Länder.

Regional pay differences and pay cuts

• “Over 3/4 of OECD countries indicate that they are engaged in or are planning reforms that will decrease the current size of their public service workforce in more than half of the Agencies and Ministries within central government. None plan to increase workforce level” (OECD, 2011)

• Health, Education, Police: Sectors may be protected from planned cuts (Spain, France).

• “The upshot is that there does not appear to be a relation between a country’s prosperity and the number of public employees it has.” Becker-Posner Blog, 09/26/2011

Downsizing the public sector: a general trend in OECD countries

A decreasing number of public employees

0

5

10

15

20

25

30

35

2008 2000

%

OECD (2011), Government at a Glance 2011, OECD Publishing.

Employment in general government as % of the labour force (2000 and 2008)

Anticipated changes in employment levels (2010)

Source: Government at a glance, OECD 2011

Consequence: an ageing structure in the public sector

0

10

20

30

40

50

60

Italy

Iceland

Swed

en

Belgium

German

y

United S

tates

Denmark

Slova

k Repu

blic

Greece

Israe

l

Norway

Finlan

d

Netherlands

Canad

a

Irelan

d

Austria

Hungary

Portuga

l

Switz

erland

United K

ingdom

France

New Zeala

nd

Slove

nia

Poland

Mexico

Australi

aJap

an

Estonia

ChileKorea

Central government Total labour force%

OECD (2011), Government at a Glance 2011, OECD Publishing.

Percentage of employees aged 50 years or older in central government and total labour force

• Diminution of the size of public sector through low replacement rate of retirees (Austria, France, Portugal: 50%; Italy, Greece: 20%; Spain: 10%)

• Problem: public pensions are often paid by the public budget => state pensions: a growing weight in public spending. Ex: In France, 8% of budget expenses in 1990, 12% in 2011.

• Increase social contributions of civil servants? Reduce the level of pensions? Increase the length of service?

• Germany: state pensions for Beamte. Since 1992, 40 years required (instead of 35 years). Between 2003 and 2009 reduction of maximum pension level for civil servants from 75 to 71.5 percent of former gross income. Actual pension levels reduced from 72.8% of the former gross income in 1994 to 69% in 2011.Portugal: change in retirement conditions and pensions. Early retirement (before 60) increased sharply since 2005, especially at the highest level: loss of human capital

What are the consequences of this demographic change?

Diversity of public pay reforms in the past decade

Pay reforms in OECD public sector:diversity, but a common pattern

• Diversity in timing• Diversity according to the institutional

framework• General pattern: decentralisation, more merit

pay, more competition• Budgetary crisis: less staff, decreasing public

wage premium• Few exceptions: Sweden

• Sweden: early fiscal consolidation, no budget crisis, no specific employment status for civil servants, no public wage premium.Deregulations, liberalization and privatizations => expose previously protected activities to competition. Since the Act on System of Choice in the Public Sector (2009) more competition between agencies within the public sector.

• Estonia: fiscal situation OK, small public sector, but decrease in public wages => labour mobility to the private sector or migration abroad.

• Germany: staff reduction and wage constraint since 1992 => reduction of public sector employment by nearly a third. Debt brake (1999). No public wage premium => no special adjustment programs for the German public sector in the crisis.

Decentralisation, various collective agreements since 2005/06.

Early Structural Reforms

• France: “General Review of Public Policies” (2007-2012) implemented to increase productivity. Restructuring and cuts in employment => worsening of working conditions.

• UK: less collective bargaining, more pay review bodies. Policies to favor local pay system (“localism”) with the aim of reducing the local public wage premium. Limited autonomy to raise pay. Social conflicts.

• Portugal: reforms in 2006. Convergence with the private sector. Then austerity measures, possibility of dismissing public employees, wage cuts. 2005: merit recognition in career. 2007: freeze on all promotions.Problems in retaining highly qualified employees

• Hungary: public wage penalty, pay scale frozen since 2006, the 13th month salary abolished in 2009, compression of the public sector wage scale, forthcoming austerity measures => migration of highly skilled employees; lack of motivation among employees, quality of services decreases.

Structural reforms compromised by the crisis?

• Spain: indiscriminate spending cuts, deterioration in working conditions, no more public wage premium.

• Greece: wage cuts for all categories of employees, new pay scale (nov 2011), reduction of 150 000 public-sector jobs through hiring freeze and elimination of temporay contracts.

No structural reforms, just facing up to the budget crisis

• Romania 2009: institutional restructuring, increase in public sector

employment (0.8 to 1.4M), then decrease (1.2 M, 50% at the local level).

2010: -25% on agreed pay,2011: wage level recovery +15%,

wage reform, new pay grid but it cannot be applied immediately.

2012: wage freeze. 2013-2014: gradual recovery

Erratic moves, incomplete reforms

Performance Related Payment in the Public Sector

Definition of Performance Related Premium

“The variable part of pay which is awarded each year (or on any other periodic basis) depending on performance. PRP may be awarded on an individual or on a team or group basis.

The definition of PRP excludes: i) any automatic pay increase by, for example, grade promotion or service-based increments (not linked to performance); ii) various types of allowances which are attached to certain posts or certain working conditions (for example, overtime allowances, allowances for working in particular geographical areas.”

(OECD, 2005)

Pros and cons of performance-related pay: theory

Incentive effect + screening device to attract the most able workers (Lazear, 2000).

Multitasks (Holmstrom, 1991).Multi-users: task is a co-production between an agent and multi-users (education, health) => risk of an increase in inequality between users (Bacache, 2006).

Most frequent negative effects observed

• Increase in personnel costs.• Measurement of non-quantifiable outputs is almost

impossible.• Costly and time-consuming to implement.• Bureaucracy increased in human resources management.• No PRP scheme can be considered completely objective.

So “the tiny line between subjectivity and arbitrariness is easily trespassed” (World Bank).

PRP and productivity in the public sector: a comparative study

• A majority of studies find some productive effect.• Studies usually for jobs when the outputs are

observable (revenue collection, teaching, health care).

• No robust evidence (+ or -) of the effects of PRP in organizational contexts similar to that of the civil service.

• Long term effect? No study.

Hasnain & al., 2012

• Germany: PRP has not been used on a large scale because employers seem to have difficulties developing appropriate indicators and human resource strategies.

• Italy: 1993 reform, the automatic component for wage increases replaced by schemes based on merit; in practice, no change.

• France: very limited performance pay, in spite of various reforms. Increase in real wage depends on career advancement (partly linked to the seniority rule).

PRP in the public sector: Much Ado About Nothing?

• European Commission project: “Public sector pay and social dialogue during the fiscal crisis” https://research.mbs.ac.uk/european-employment/Ourresearch/Currentprojects/Publicsectorpayprocurementandinequalities.aspx

• ILO, Public Sector Adjustments in Europe – Scope, Effects and Policy Issues, to be published.

• OECD 2011, Government at a Glance, Paris, OECD.

References 1 – on public pay reforms

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• Bacache M, 2006, “How incentives increase inequality”, Labour, 20(2), 2006, p. 383-391

• Hasnain Z., Manning N., Pierskalla J., 2012 Performance-related Pay in the Public Sector, WP 6043, April, The World Bank

• Holmstrom, B. and P. Milgrom, 1991, “Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design”, Journal of Law, Economics & Organization, 7, 24-52.

• Lazear, E. P. (2000), “Performance Pay and Productivity”, The American Economic Review, 90 (5), 1346-1361.

• Leigh A., 2011, The Economics and Politics of Teacher Merit Pay, • Marsden D., 2009, The Paradox of Performance Related Pay Systems,

CEP DP, n°946.

References 2 – on performance-related pay