1 Pay Reforms across the OECD Dominique Meurs University Paris Ouest Nanterre la Defense
2 Outline RC1 Similar responsesto the budgetarycrisis 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?
3 Slide 2 RC1 Richard, 20/11/2012
4 Similar responses to the budgetary crisis
5 How to reduce the public wage bill? Wages: cuts, freezes, etc. Employment : downsizing of the public sector Pensions
6 Public sector: pay freezes, pay cuts Annual collectively agreed pay in the civil service % Pay cuts
7 Regional pay differences and pay cuts 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 adverseeffects 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.
8 Downsizing the public sector: a general trend in OECD countries 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
9 South Africa Brazil A decreasing number of public employees % Employment in general government as % of the labour force (2000 and 2008) Norway Denmark Sweden Finland France Hungary Estonia Luxembourg United Kingdom Belgium Canada Israel Australia OECD32 Ireland Slovenia United States Italy Czech Republic Spain Portugal Netherlands Austria Turkey Slovak Republic New Zealand Poland Switzerland Germany Chile Mexico Greece Japan Korea Russian Federation OECD (2011), Government at a Glance 2011, OECD Publishing.
10 Anticipated changes in employment levels (2010) Source: Government at a glance, OECD 2011
11 Consequence: an ageing structure in the public sector Central government Total labour force Italy Iceland Sweden Belgium Germany United States Denmark Slovak Republic Greece Israel Norway Finland Netherlands Canada Ireland Austria Hungary Portugal Switzerland United Kingdom France New Zealand Slovenia Poland Mexico Australia Japan Estonia Chile Korea % Percentage of employees aged 50 years or older in central government and total labour force OECD (2011), Government at a Glance 2011, OECD Publishing.
12 What are the consequences of this demographic change? 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 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 Portugal: change in retirement conditions and pensions. Early retirement (before 60) increased sharply since 2005, especially at the highest level: loss of human capital
13 Diversity of public pay reforms in the past decade
14 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
15 Early Structural Reforms 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.
16 Structural reforms compromised by the crisis? France: General Review of Public Policies ( ) 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 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 sectorwage scale, forthcoming austerity measures => migration of highly skilled employees; lack of motivation among employees, quality of services decreases.
17 No structural reforms, just facing up to the budget 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 public-sector jobs through hiring freeze and elimination of temporay contracts.
18 Erratic moves, incomplete reforms 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 : gradual recovery
19 Performance Related Payment in the Public Sector
20 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 servicebased 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)
21 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).
22 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).
23 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
24 PRP in the public sector: Much Ado About Nothing? 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).
25 References 1 on public pay reforms European Commission project: Public sector pay and social dialogue during the fiscal crisis ndinequalities.aspx ILO, Public Sector Adjustments in Europe Scope, Effects and Policy Issues, to be published. OECD 2011, Government at a Glance, Paris, OECD. jeudi 6 décembre
26 References 2 on performance-related pay Bacache M, 2006, How incentives increase inequality, Labour, 20(2), 2006, p 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, AssetOwnership, and Job Design, Journal of Law, Economics & Organization, 7, Lazear, E. P. (2000), Performance Pay and Productivity, The American Economic Review, 90 (5), 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.