REFORMING EMPLOYMENT AND WAGES:

The experience of OECD member countries

Mario Marcel Deputy Director

Public Governance and Territorial Development

Directorate

Rome, 14 November 2011

2

Table of Content

1. The Fiscal Consolidation Imperative

2. Plans to reduce payroll and labour costs

3. Restructuring the government workforce

4. How to maintain and improve capacity and produce savings?

5. Reforming compensation of public employees

6. Towards successful employment and compensation reforms

Over the last decade the public employment share of the labour force remained

fairly constant in most OECD countries.

0

5

10

15

20

25

30

352008 2000

Employment in general government as a % of the labour force (2000-2008)

Source: ILO, LABORSTA, OECD

1. The Fiscal Consolidation Imperative

3

0

2

4

6

8

10

12

14

16

18

202000 2009

General government compensation of employees as a % of GDP (2000-2009)

On average the wage bill in the OECD area increased from 10.5% to 11.2% of

GDP between 2000 and 2009.

Source: OECD National Account Statistics 4

5

0

5

10

15

20

25

30

35

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

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2009

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2009

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2009

2000

2009

2000

2009

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2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

2000

2009

DNK NLD FIN SWE ISL FRA BEL GBR ISR HUN CAN NOR CZE EST PRT NZL GRC SVN ESP ITA DEU IRL USA AUT SVK AUS POL JPN LUX TUR KOR CHE CHL MEX OECD33RUS

Consumption of fixed capital Costs of goods and services used and financed by general government

Compensation of general government employees

%

Production costs as a percentage of GDP (2000 and 2009)

Source: OECD National Account Statistics

Compensation of employees accounts for 48% of the cost of producing goods

and services compared to 43% paid to non-immediate actors for intermediate

goods and services or to deliver services.

•Reductions in operational expenditures are believed to have the most lasting

impact in finances stabilisation and achieving deficit goals.

0

5

10

15

20

25

Wage cuts Staff reductions(replacement ratios, total

job cuts)

Reorganisation ofgovernment

Redefining standards

Nu

mb

er

of co

un

trie

s

Source: OECD (2011) Restoring public finances, fiscal consolidation in OECD countries. OECD Journal

on Budgeting .

•Fiscal consolidation plans place particular emphasis on cutting expenditure

over raising revenues.

Measures in fiscal consolidation plans to reduce operating expenditure

6

0,0

0,2

0,4

0,6

0,8

1,0

1,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

PRT HUN IRL GBR CZE GRC ITA SVK NLD BEL USA

Operational expenditure Wage cuts

Impact of operational measures (in % of GDP)

Cumulative reductions in operating expenditure produces savings in GDP.

7 Source: OECD (2011) Restoring public finances, fiscal consolidation in OECD countries. OECD Journal

on Budgeting .

2. Plans to reduce payroll and labour costs

80% of OECD countries are restructuring government and ‘right-sizing’ the

workforce.

Ukra

ine

Slovenia

Belgium

Au

stra

lia

Decrease

expected

(26 countries)

No change expected

(7 countries)

Anticipated changes in employment levels in more than 50% of agencies and ministries

Source: 2010 Survey on Strategic HRM in Central/Federal Governments of OECD Countries

8

OECD countries have announced staff reduction targets:

Austria: 3 000 federal officials by 2014

France: 97 000 public sector jobs by only replacing 1 out of 2 retiring employees

Germany: 10 000 federal public sector jobs by 2014

Greece: 20% of retiring employees replaced, fewer than short-term contract

employees

Ireland: 24 750 public sector jobs by 2014

Portugal: Recruitment freeze of civil servants (no replacements)

Spain: 10% replacement of vacant positions between 2011-2013

Japan: net reduction of 5% since 2005

Denmark: reduction of administrative staff

United Kingdom: 330 000 public sector jobs by 2014

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Wage reduction targets in OECD countries:

Belgium: 0.7% savings on personnel expenditures.

France: Freezing public sector wages in 2011

Greece: Allowances cut by 20% in 2010

Ireland: 13.5% public sector wage cut in 2009-10

Portugal: 5% wage cut in the public sector. 0.11% to 0.84% of GDP wage cut by 2013

Spain: 5% wage cut in 2010, frozen in 2011

Netherlands: From January 2011 government froze public sector pay for at least

two years

Czech Republic: 10% wage cut in the public sector (excluding teachers)

United Kingdom: Two-year wage freeze

Estonia: 9% savings on personnel expenditure

United States: Two-year wage freeze, expected savings of up to USD 28 billion over

5 years

Canada: In 2010, a three-year freeze of departments’ salaries was announced

10

Key message from the current crisis:

The size of fiscal consolidation needs is related to government’s ability to

match revenues to expenditure and not to the overall size of government

relative to the economy.

AUS

HUN

BEL

FIN

NZL

AUT

DEU

CAN

CZE

ISL

SVK

NLD ITA

ESP

FRA

GRC

PRT

POL

GBR

USA

IRL

CHE

DNK

KOR

LUX

SWE

30

35

40

45

50

55

60

-5 0 5 10 15 20

Gen

era

l g

overn

men

t exp

en

dit

ure

s a

s a

sh

are

of

GD

P

(2009)

Total change required in primary balance to bring gross debt to 60% of GDP by 2026

No consolidation needed

Source: OECD Economic Outlook No.88

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12

Consolidation under market

pressure

Greece, Hungary, Ireland, Portugal,

Spain

Pre-emptive consolidation

Estonia, Germany, Netherlands, New

Zealand, United Kingdom

Consolidation needed but not

substantial consolidation plan

announced yet

France, Japan, Poland, United States

Comparatively low fiscal

consolidation needs

Australia, Chile, Finland, Korea, Norway,

Sweden

Fiscal consolidation strategies in OECD countries

Almost all OECD countries have announced fiscal deficit reduction targets at

least to 2013 and, to a lesser extent, consolidation plans to achieve deficit

targets.

Four group of countries are emerging:

Source: OECD (2011) Restoring public finances, fiscal consolidation in OECD countries. OECD Journal

on Budgeting .

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3. Restructuring the government workforce

Structural and organisational

reforms

Budgetary instruments HRM instruments C

orp

ora

tisation,

pri

vatisation,

outs

ourc

ing

Tra

nsfe

r of

activitie

s to

ag

encie

s o

r

sub

-national le

vels

of g

overn

ment

Org

anis

ational

restr

uctu

ring

/

str

eam

linin

g

Ad h

oc b

udg

et

cuts

Auto

matic

pro

ductivity c

uts

Pro

gra

mm

e

revie

ws/s

trate

gic

revie

ws/s

pendin

g

revie

ws

Job

cuts

/

redundancy

pro

gra

mm

es

Recru

itm

ent

freeze

Earl

y r

etire

ment

pro

gra

mm

es

Redep

loym

ent

pro

vis

ions

Australia 1975 – mid-

1990’s 1996-99 1996-99 1987 on 1990’s

1990’s

(some

depts.)

Ongoing

Austria Planned 2011-

14

Planned

2011-14 1999 on

Canada 1990’s 1989-93 1989 on 2010 1990’s on 1990’s 1990’s Ongoing

Finland 1986-91,

2003 1986-91 2003 2003 on 1997 on 2006 on 1990’s on 2003 on 2006 on

France 1990’s 1980’s on Ongoing 2003 on 2007 on 2009 on

Japan 2005 on 2005 on 2005 on 2005 on 2005 on 2006 on

Korea 1993, 2008 2003

Mexico 2007 on 2010 on 2007 on

Netherlands 1982 on 1990 on 2007 on 1994 on 1981 2010 on Ongoing

Norway 1992-08 2006

Portugal 2005 on 2005 on 2010 2005 on 2006 on

Spain 2000 on 2010 on 2010 2010

Sweden 1990 on 1988 on 2010 on 1990’s Ongoing 1980’s,

1990’s 1989, 1994 on

Switzerland 1996 on 1986-95 2003 on 2010

United

Kingdom 1990’s 1990’s 2004 on 2010 2004 on

2004-08

2010 on Occasionally 2008

Reforms and instruments that have an impact on the size and allocation of the workforce

Source: OECD (2011) Public servants as partners for growth.

Lessons from previous experience

1. No ‘right size’ of the public service.

2. Structural reforms have produced large-scale workforce

reduction.

3. Efficiency measures have achieved small-scale staff

reductions.

4. Ad hoc downsizing exercises prevent engaging in workforce

planning and risk substantial longer-term negative effects.

5. Automatic productivity cuts have the potential to manage the

size of the workforce in a more sustainable manner.

6. Downsizing should be part of a broader efficiency and service

delivery strategy and within the framework of strategic

workforce planning.

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4. How to maintain and improve capacity and produce

savings?

1. Workforce implications of any public service reform need to be planned

and be part of broader reforms.

2. The workforce should be seen as an asset rather than as a cost.

3. Workforce planning, assessment of future capacity and human capital

requirements remain under-used.

Key messages for current and future workforce restructuration efforts:

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4. Large scale downsizing is the most problematic option for workforce

adjustment.

5. Recruitment freezes are the most detrimental approach to downsizing.

6. Redeployment arrangements can help to retain skills and experience and

manage industrial relations.

5. Reforming compensation of public employees

Issues at stake for OECD countries

The bottom line

i) How to manage compensation in times of downsizing and restructuring

ii) How to evolve from traditional step increase compensation schemes

to individualised pay

In the context of the governments’ need to do more and better with less,

employee commitment is a core consideration.

Broad total compensation programmes are a key component of strategic

human resource management.

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Tendencies in compensation reform:

• Individualization and market compliance of remuneration

• Performance-related pay

• Local pay setting

• Dialogue between the manager and the subordinate

The rationale:

• Improve government’s ability to recruit and retain competent staff

• Best tool to motivate, develop and engage staff

• Meet the expectations of young generations

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6. Towards successful employment and compensation reforms

1. There is no single formula for success.

2. Sometimes reforms have blurred objectives and unclear implementation

strategies.

3. HRM reforms are lengthy processes and their results may not be apparent

for a number of years.

5. ‘Reform’ is continuous – monitoring reforms is critical to keep track.

6. There is the need to be prepared for a change from a crisis to a post-crisis

scenario to avoid setbacks.

4. HRM reforms should not be approached as stand-alone modernisation

initiatives.

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Annex

A critical issue is the executive compensation problem

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AUS AUT BEL CHL DNK EST FIN HUN ISL IRL ITA KOR NLD NZL NOR SVN ESP SWE GBR USA OECD BRA

2009 USD PPP Wages and salaries Social contributions Working time correction

Average annual compensation of central government senior managers (2009) Adjusted for differences in holidays

Source: 2010 Survey on Compensation of Government Employees in Central/Federal Governments of

OECD Countries

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Considerations in reforming employees’ pay programmes

1. Ability to govern and manage … the pay programme is an important

tool for managers

2. Ability to adapt and evolve … if problems are anticipated, the pay

issues should be addressed as early as possible as traditional pay

programmes are likely to be an impediment for change.

3. Ability to attract, motivate and retain … new policies and practices

should be evaluated in terms of their impact on employee’s

behaviour throughout the transition

4. Ability to perform … consideration should be given to how the new

programme will influence employee’s performance

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Key messages in reforming compensation schemes

• There is no single ‘textbook’ answer or approach – the most difficult

change initiative for an employer

• A mix of grade increases, step increases and performance based

increases seems to be a reliable option

• Performance-related pay may not be the right answer for all civil

servants in every function and situation

When endeavouring a compensation reform:

• Define the permissible increase so employees know what to expect

• Communicate the organisation’s compensation philosophy, especially

when there is a change in policy

• The transition to performance-related pay should be managed as

organisational change.

• Experience shows that these initiatives sometimes fail due to the lack

of managers’ commitment to performance management.

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