June 9, 2016/IMF
Executive Summary
Government compensation and employment policies are important for the efficient delivery of public services which are crucial for the functioning of economies and the general prosperity of societies. On average, spending on the wage bill absorbs around one-fifth of total spending. Cross-country variation in wage spending reflects, in part, national choices about the government’s role in priority sectors, as well as variations in the level of economic development and resource constraints.
Pressures on wage spending will increase over the coming decades in many countries. Advanced economies are facing fiscal challenges associated with aging populations while also needing to reduce high public debt levels. Emerging markets and low income countries have pressures to expand public service coverage in the context of revenue and financing constraints and the need for higher public investment.
Effective management of wage bill spending is needed to ensure that the desired public services are delivered in a cost-effective and fiscally sustainable manner. This requires adequate fiscal planning to ensure appropriate financing of the wage bill, competitive compensation to attract and retain skilled staff and incentivize performance, and the flexibility to adjust the level and composition of employment to respond efficiently to demographic and technological developments. Experience has shown that countries across all income levels have faced challenges in these areas.
Strengthening institutions is crucial for effective and sustainable wage bill management. For example, improving medium-term wage forecasting, and strengthening links between wage determination processes and fiscal frameworks, can enhance fiscal planning. Competitive compensation can be promoted through public and private sector wage comparisons. Position-based employment systems can give greater flexibility to adjust employment levels to ensure efficient service delivery.
Investing in better monitoring and information systems can greatly contribute to more effective wage bill management. The current lack of data on the level and composition of wage bill spending and employment levels reflect the precarious state of systems for monitoring and reporting wage bill spending.
