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How public sector pay and employment affect labor markets : research issues

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  • Stevenson, Gail
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    Structurally, the public sector has a more important economic role to play in developing countries than in industrial countries, particularly in how it affects labor markets. Evidence from many developing countries shows that public sector pay, employment, and performance are hurting the labor markets'ability to allocate workers among sectors and skill requirements. In many countries, the civil service and the public sector wage bill have grown to unsustainably high levels. The public sector is so big that interventions in the sector - with or without spillover effects into the nonpublic sector - make it more difficult for wages and employment to respond to shifts in demand and supply. Nonwage benefits are seldom related to productivity, so they can be particularly distorting. At the same time, a long-term drop in real civil service wages and the compression of wage ranges have caused critical shortages of managerial and technical workers in the civil service. The resulting skill imbalances in the rest of the domestic economy reduce international competitiveness in some countries. Policy reform has focused on the reform of large, inefficient public sectors because of their cumulative negative effects on economic growth and competitiveness. Policies to adjust relative prices from nontradables toward tradables have led to some movement of employment out of the public sector, but significant rigidities remain. Workers are attracted to the public sector because of complex economic and social incentives that are difficult to change - and the relationship between public sector interventions and the underlying political and economic forces is an important area for research. The slow progress in restructuring the public sector in many countries highlights the needto address more forcefully and more subtly how public sector policies affect the labor market.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 944.

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    Date of creation: 31 Aug 1992
    Handle: RePEc:wbk:wbrwps:944
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    1. Levy, Victor & Newman, John L, 1989. "Wage Rigidity: Micro and Macro Evidence on Labor Market Adjustment in the Modern Sector," World Bank Economic Review, World Bank Group, vol. 3(1), pages 97-117, January.
    2. Riveros, Luis A., 1992. "Labor costs and manufactured exports in developing countries: An econometric analysis," World Development, Elsevier, vol. 20(7), pages 991-1008, July.
    3. Lopez, Ramon E. & Riveros, Luis A., 1989. "Macroeconomic adjustment and the labor market in four Latin American countries," Policy Research Working Paper Series 335, The World Bank.
    4. Lindauer, David L & Meesook, Oey Astra & Suebsaeng, Parita, 1988. "Government Wage Policy in Africa: Some Findings and Policy Issues," World Bank Research Observer, World Bank Group, vol. 3(1), pages 1-25, January.
    5. Lindauer, David L., 1991. "Parastatal pay policy in Africa," World Development, Elsevier, vol. 19(7), pages 831-838, July.
    6. Nunberg, Barbara & Nellis, John, 1990. "Civil service reform and the World Bank," Policy Research Working Paper Series 422, The World Bank.
    7. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
    8. Chew, David C. E., 1990. "Internal adjustments to falling civil service salaries: Insights from Uganda," World Development, Elsevier, vol. 18(7), pages 1003-1014, July.
    9. Horton, Susan & Kanbur, Ravi & Mazumdar, Dipak, 1991. "Labor markets in an era of adjustment : an overview," Policy Research Working Paper Series 694, The World Bank.
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