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Public Sector Compensation in Times of Austerity

image of Public Sector Compensation in Times of Austerity

Austerity drives are leading governments to reduce operational cuts through the wage bill and staffing levels. A big lesson from past experience suggests that when pay cuts and freezes are necessary, it is essential to assess the savings relative to the costs – the loss of institutional knowledge if key contributors retire or resign, the time lost by managers and employees who have to deal with the issues related to vacancies and reorganizations, the lost productivity while people acquire new skills and learn new jobs, and the falloff in performance among employees who become discouraged or unsatisfied. This assessment does not appear to have taken place in the current crisis.

This report argues that any new approaches to public sector pay must help to: enhance external competitiveness of salaries; promote internal equity throughout the public sector; reflect the values of public organisations; and align compensation with government’s core strategic objectives. It calls for a recognition of the supply and demand for specific expertise.

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Current trends in the compensation of public employees in OECD countries

Compensation of public employees – which is key to attracting, motivating and retaining qualified workers – will likely be affected by the budget crisis, through cuts/freezes in pay/benefits or possible reductions in staffing levels. Fiscal consolidation through budget cuts can be a double-edged sword if staff reduction (for short-term needs) is severe, or “rightsizing” initiatives result in a loss of capacity to deliver needed services or a demoralised workforce. Review of measures implemented in OECD countries suggests that it is more the style and practices of management and/or the composition of the public workforce – not its size or the level of operational expenditure – that stand out as causes of budget imbalances in the first place. Involving public employees in decision making regarding salary and workforce reduction measures can be a useful means for ascertaining how far they are willing to go to avoid job losses and accept salary reductions or freezes.

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