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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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Preface

Since the global financial crisis broke in 2008, most OECD member countries have introduced measures intended to restore public finances. Over three quarters of the OECD countries participating in the OECD Fiscal Consolidation Survey 2012 have marked operational expenditures for savings with wage cuts and staffing reductions included in the reform agenda. More than half are introducing wage cuts (e.g. wage freezes in the United Kingdom and the United States, and 5-10% wage cuts and salary freeze in Portugal and Spain) and a quarter are undertaking staff reductions (e.g. 10-12% reduction in staff in the Czech Republic, Ireland and Poland, and up to 10 000 staffing positions to be permanently abolished by 2014 in Germany). These are significant orders of magnitude as governments in OECD countries employ 15% of the labour force, and compensation costs account for 23% of government expenditures, representing 11% of GDP on average. However, the effects of salary cutbacks and freezes on staff motivation and the longer-term consequences on the ‘attractivity’ of the public sector as an employer are not clear yet.

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