What about public sector wage bill cuts to finance coronavirus response?

Governments all over the world are undertaking emergency financing measures to support their response to the COVID-19 pandemic. One question that has emerged in policy discussions is whether, and in what circumstances, reductions in the public sector wage bill, which accounts for roughly 8% of GDP and 30% of government expenditures globally, may be helpful to finance some of this emergency response. Is this a good idea, and when?

In many countries, public sector workers are a privileged group. They have employment protections, and on average are paid 20% more than their peers in the private sector. Therefore, it is tempting for policy-makers and the public to think that they need to make a sacrifice for the public good. While each country has its own circumstances that determine the appropriate policy response the following considerations may inform such decisions.

First, the public sector is a large employer, and protecting all jobs, public and private, is a priority right now.  Globally, the World Bank estimates that public sector employees represent around 15% of all workers and 30% of wage workers. Any cuts in employment or wages of such a large share of the global workforce may have a significant impact on livelihoods, depending on country contexts. The public sector wage premium is also skewed towards women and lower-skilled workers; hence across-the-board cuts in their wages will have a disproportionate impact on groups that need protection the most.

Second, public sector workers are providing a large proportion of essential crisis response services on the front lines.  For example, in 10 Latin American countries, according to preliminary World Bank data (expected to be published June 2020), roughly 30% of public sector workers are teachers and another 12% are medical staff. Almost half of the doctors in Latin America work in the public sector. If you factor in engineers, police, welfare officers, tax officials, utility workers, and agricultural extension workers, a strong case can be made for additional pay for these employees (instead of wage or allowance cuts) to ensure they continue to work overtime and deliver their desperately needed services. 

Third, as countries face critical shortages of essential personnel to respond to the crisis, some governments could redeploy current staff, cut red tape to enable home-based work, and reorganize tasks and responsibilities instead of imposing cutbacks and lay-offs.  Unfortunately, many governments lack the data and technology systems, the flexibility in HR rules, or the coordination to redeploy their human resources at short notice. This calls for a “do no harm” strategy in the short-term, with the objective of building institutional capacity to respond to such emergencies in the medium to long term. 

Finally, a reduced public-sector workforce during the crisis might impede the recovery process after the health crisis passes  (economically and across other social indicators). Many functions and services, notably education, will need to make up for lost time and will require greater support and management to do this effectively. In past fiscal crises that short-term measures like downsizing and wage cuts have created long-term distortions in public sector employment and wages. 

The COVID-19 crisis has highlighted the importance of effective public institutions to protect lives and livelihoods . It has also dramatically and tragically exposed vulnerabilities in state capacity, in high- and low-income countries alike. After COVID-19, the public sector is likely to need significant reforms in many countries to be better able to manage the next crisis.