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Efficient public sector downsizing

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  • Rama,Martin G.

Abstract

Most downsizing operations show high financial returns, but their economic returns depend crucially on their design. After comparing public sector employment across countries, the author analyzes the optimal design of downsizing operations from a microeconomic perspective. The author discusses how to identify redundant workers when individual productivity is observable, as is often the case in state enterprises. Comparisons of productivity and labor costs are misleading because overstaffing is only one among several distortions. The author proposes using a shadow cost of labor, much the same as in standard investment projects. The author then discusses how to identify redundancies when individual productivity cannot be observed, as in government administration. Voluntary separations in exchange for severance pay create an adverse selection problem, whereby the best workers leave the public sector and the worst workers stay. The author discusses other self-selection methods more likely to create an incentive for the best workers to stay rather than quit. Most offers of severance pay tend to overcompensate workers. The author analyzes how labor data can be used to predict the loss replaced workers will experience and to tailor compensation to their individual characteristics. Finally, the author discusses the appropriate sequence of downsizing and privatization, the consequences of early retirement programs, and the usefulness of training programs and other active labor policies.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1840.

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Date of creation: 01 Sep 1997
Date of revision:
Handle: RePEc:wbk:wbrwps:1840

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Keywords: Environmental Economics&Policies; Banks&Banking Reform; Health Monitoring&Evaluation; Inequality; Labor Policies; Public Health Promotion; Public Sector Economics&Finance;

References

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  1. Svejnar, Jan & Terrell, Katherine, 1991. "Reducing labor redundancy in state owned enterprises," Policy Research Working Paper Series 792, The World Bank.
  2. Florencio Lopez-de-Silane, 1996. "Determinants of Privatization Prices," NBER Working Papers 5494, National Bureau of Economic Research, Inc.
  3. Squire, Lyn, 1989. "Project evaluation in theory and practice," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 21, pages 1093-1137 Elsevier.
  4. Haltiwanger, John & Singh, Manisha, 1999. "Cross-Country Evidence on Public Sector Retrenchment," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(1), pages 23-66, January.
  5. Peter R. Fallon & Robert E. B. Lucas, 1989. "Job Security Regulations and the Dynamic Demand for Industrial Labor in India and Zimbabwe," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 2, Boston University, Institute for Economic Development.
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  8. Orazem, Peter & Vodopivec, Milan & Wu, Ruth, 1995. "Worker displacement during the transition : experience from Slovenia," Policy Research Working Paper Series 1449, The World Bank.
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  15. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "Reviving project appraisal at the World Bank," Policy Research Working Paper Series 1496, The World Bank.
  16. Commander, Simon & Davoodi, Hamid R. & Lee, Une J., 1997. "The causes of government and the consequences for growth and well-being," Policy Research Working Paper Series 1785, The World Bank.
  17. Knight, Malcolm & Loayza, Norman & Villanueva, Delano, 1996. "The peace dividend : military spending cuts and economic growth," Policy Research Working Paper Series 1577, The World Bank.
  18. Bruce C. Fallick, 1995. "A review of the recent empirical literature on displaced workers," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-14, Board of Governors of the Federal Reserve System (U.S.).
  19. John Vickers & George Yarrow, 1991. "Economic Perspectives on Privatization," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(2), pages 111-132, Spring.
  20. Alderman, Harold & Canagarajah, Sudharshan & Younger, Stephen, 1995. "A Comparison of Ghanaian Civil Servants' Earnings before and after Retrenchment," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 4(2), pages 259-88, October.
  21. Rama, Martin & MacIsaac, Donna, 1999. "Earnings and Welfare after Downsizing: Central Bank Employees in Ecuador," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(1), pages 89-116, January.
  22. Schiavo-Campo, Salvatore & de Tommaso, Giulio & Mukherjee, Amitabha, 1997. "An international statistical survey of government employment and wages," Policy Research Working Paper Series 1806, The World Bank.
  23. Topel, Robert, 1990. "Specific capital and unemployment: Measuring the costs and consequences of job loss," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 33(1), pages 181-214, January.
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Citations

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Cited by:
  1. Virgilio Galdo & Alberto Chong, 2006. "On Foreign Participation and Hiring Patterns After Privatization," Research Department Publications, Inter-American Development Bank, Research Department 4441, Inter-American Development Bank, Research Department.
  2. Mauricio Olivera & Felipe Barrera, 2007. "Does Society Win or Lose as a Result of Privatization? The Case of Water Sector Privatization in Colombia," Research Department Publications, Inter-American Development Bank, Research Department 3230, Inter-American Development Bank, Research Department.
  3. Alberto Chong & Florencio Lopez-de-Silanes, 2003. "La privatización y la reestructuración de la fuerza laboral en todo el mundo," Research Department Publications, Inter-American Development Bank, Research Department 4330, Inter-American Development Bank, Research Department.
  4. Alberto Chong & Florencio Lopez-de-Silanes, 2003. "The Truth About Privatization in Latin America," Research Department Publications, Inter-American Development Bank, Research Department 3180, Inter-American Development Bank, Research Department.
  5. Jorge Martinez-Vazquez & Ming-Hung Yao, 2009. "Fiscal Decentralization and Public Sector Employment: A Cross-Country Analysis," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0903, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  6. Alberto Chong & Virgilio Galdo & Máximo Torero, 2005. "¿Cumple la privatización lo que promete? El acceso a los servicios telefónicos y el ingreso familiar en zonas rurales pobres empleando un experimento cuasinatural en Perú," Research Department Publications, Inter-American Development Bank, Research Department 4418, Inter-American Development Bank, Research Department.
  7. Alberto Chong & Gianmarco León, 2007. "Empresas privatizadas, instituciones y consecuencias laborales en paises emergentes," Research Department Publications, Inter-American Development Bank, Research Department 4525, Inter-American Development Bank, Research Department.
  8. Dani Rodrik, 1997. "What Drives Public Employment?," NBER Working Papers 6141, National Bureau of Economic Research, Inc.
  9. Virgilio Galdo & Alberto Chong, 2006. "Sobre la participación extranjera y los patrones de contratación después de la privatización," Research Department Publications, Inter-American Development Bank, Research Department 4442, Inter-American Development Bank, Research Department.
  10. Chong, Alberto & Lopez-de-Silanes, Florencio, 2002. "Privatization and labor force restructuring around the world," Policy Research Working Paper Series 2884, The World Bank.
  11. Chong, Alberto E. & Galdo, Virgilio & Torero, Maximo, 2006. "Does Privatization Deliver? Access to Telephone Services and Household Income in Poor Rural Areas Using a Quasi-Natural Experiment for Peru," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia, International Association of Agricultural Economists 25691, International Association of Agricultural Economists.
  12. Gianmarco León & Alberto E. Chong, 2007. "Privatized Firms, Rule of Law and Labor Outcomes in Emerging Markets," IDB Publications 6848, Inter-American Development Bank.
  13. Mauricio Olivera & Felipe Barrera, 2007. "La sociedad gana o pierde como resultado de la privatizacion? El caso de Colombia," Research Department Publications, Inter-American Development Bank, Research Department 3231, Inter-American Development Bank, Research Department.
  14. Alberto Chong & Virgilio Galdo & Máximo Torero, 2005. "Does Privatization Deliver? Access to Telephone Services and Household Income in Poor Rural Areas Using a Quasi-Natural Experiment in Peru," Research Department Publications, Inter-American Development Bank, Research Department 4417, Inter-American Development Bank, Research Department.

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