Employment and Wages in the Public Sector: A Cross-Country Study

IMF Working Papers, July 1, 1995

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Employment and Wages in the Public Sector: A Cross-Country Study

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Bibliographic details

• Published: July 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451849110.001

Scope and methodology

• Panel data for 34 LDCs and 21 OECD countries from 1972–992.
• Estimation approach: equations suggested by an efficiency wage model.
• Primary focus: determinants of employment and wages in the public sector.

Key findings on government employment

• Government employment is positively associated with:
  • Relaxation of resource constraints:
  • The revenue-to-GDP ratio (developing countries).
  • Foreign financing (developing countries).
  • GDP per capita (OECD countries).
  • Urbanization.
  • The level of education.
  • Certain countercyclical pressures for government hiring:
  • The real effective exchange rate (developing countries).
  • Private employment (OECD countries).

Key findings on government wages

• Certain measures of government wages are:
  • Positively associated with government revenues.
  • Negatively associated with:
  • The level of education.
  • Government debt.
  • Countercyclical pressures.

Interpretation and mechanisms

• Results are interpreted within an efficiency wage framework estimating how labor-market and fiscal variables influence public-sector employment and pay.
• Differences between developing (LDC) and OECD country results highlight distinct channels:
  • In developing countries, external financing and exchange-rate related pressures play a role.
  • In OECD countries, domestic income level (GDP per capita) and private employment interactions matter.

Policy implications

• Fiscal capacity (revenue-to-GDP and foreign financing) can expand public employment in developing countries; fiscal consolidation or revenue shortfalls could constrain hiring.
• In OECD contexts, higher GDP per capita supports larger government employment, implying macroeconomic performance underpins public-sector size.
• Education expansion is linked to higher government employment but associated with lower government wages, suggesting workforce composition and wage-setting pressures interact.
• Countercyclical pressures (e.g., exchange-rate movements, private employment declines) can drive government hiring, indicating the public sector acts as a buffer in downturns.
• Governments facing high government debt may experience downward pressure on public-sector wages.

Source: Employment and Wages in the Public Sector: A Cross-Country Study (IMF Working Paper No. 1995/070).