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October 22, 2010

Evaluating Government Employment and Compensation of Employees

Posted by Izabela Karpowicz

Tnm1015[1] 1 
The technical manual TNM/10/15 describes quantitative criteria for evaluating government employment and compensation and offers some options for reform.Various indicators are used for analyzing government employment and compensation. These can be grouped into three categories—compensation of employees (i.e., “the wage bill”), employment, and wage levels.

Commonly used criteria for evaluating government compensation include: compensation as a share of GDP, of revenues, and of total spending. These ratios vary across regions, countries, different levels of government, and income levels. Another indicator, the ratio of government compensation to non-wage outlays, measures spending efficiency.

The share of government employment in total and private employment is a useful starting point for evaluating government employment. Another indicator is the share of government employment to total population. Variations in these ratios across countries may reflect a number of factors, including differences in the size and scope of the government and the impact of government policies.

A helpful indicator for comparing government wage levels across countries is the average wage as a share of GDP per capita.It is also useful to compare average government wages to private sector wages at the same salary grade or for employees sharing similar characteristics (age, gender, education, time in job). Wage differentials must provide performance incentives and be set in line with market pay levels in order to attract and retain qualified staff without overpaying them. Compression ratio—the ratio of the highest salary to the lowest on the salary scale—is another indicator of the adequacy of pay.

Several issues may arise in assessing government expenditures on employee compensation: government sector coverage may vary across countries and numbers may be incomparable; a large share of compensation may not be captured in wages and salaries when employees receive allowances, bonuses, and in-kind benefits; compensation elements may be hidden in other expenditure lines; and the presence of ghost workers may distort the size of government employment and estimated average wages. A large degree of judgment and a case-based approach are often necessary.

Many countries have implemented measures to control the growth of the wage bill in times of fiscal pressures. These have included both short- and medium-term actions. In the short term the focus has been mainly on reducing government employment through a hiring freeze, and/or containing the growth of wages through temporary freeze in nominal wages. These short-term measures should be replaced over time with more sustainable medium-term reforms. Such reforms entail more often than not the need of an expenditure review that examines the role of government and the cost effectiveness of different policy interventions, and a functional review of government departments that can identify areas of duplication and overlap.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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