Answer to Question #198182 in Microeconomics for Afikile

Question

Based on your review of the experience of other nations and literature arrive at a conclusion on if the public sector wage bill can be an effective expenditure control measure

Answer 1

The public sector wage bill can be broken down into two elements: government employment and compensation per government employee. Changes to the government wage bill need to be assessed in comparison with developments in the private sector. The public sector wage bill can be used as fiscal policy as it affects government spending and tax on a pay as you earn tax. Based on the level of the economy the country is in, the government can increase or decrease the wage bill and tax rates. Works of literature on other countries' experiences have proved to be very effective by using public sector wage bills to control expenditure on countries such as UK and United States.

A recent study done by the European Union on member countries indicated that changes to the government wage bill need to be assessed in comparison with developments in the private sector. Regarding wages, the growth per government employee was higher compared to the private sector in the initial phase of the crisis (2007-2010), as the latter was hit more immediately by the economic recession. The cumulative excess was then mostly reversed over 2010-2014 by public wage-containment policies, including wage freezes, but also nominal reductions in salaries and benefits in some cases. There was substantial heterogeneity across EU countries in the evolution of public wages and employment. The recent cost-cutting public wage bill measures were mainly driven by fiscal consolidation requirements. It has been argued that these adjustments may have entailed costs in terms of output losses and higher unemployment. However, such adverse macroeconomic effects are largely felt, if anything, in the short run.