Macroeconomics of Public Sector Reform

Without knowing the details of today’s deal, it is still worth thinking about the macroeconomics of public sector reform.  I will take it that the deal delivers widespread productivity growth in the public sector.

All else equal, an improvement in the quality or output of public services should be valued by the population. It is desirable that this be reflected in the measurement of GDP and various countries are attempting to capture quality and output measures for public services to this end. (The alternative is to measure public sector output by the volume of inputs – but this cannot capture productivity growth.)  The value to the population of extended opening hours, for example, should be considerable.  It would be helpful if Ireland made efforts to improve the measurement of the public sector contribution to GDP.

Next, for given levels of output and quality, an improvement in productivity means that the public sector requires fewer workers.  This expands the supply of labour to the private sector.  This will benefit private-sector enterprises, including via the attendant downward pressure on wage levels.  A cautionary note:  the initial impact of technological progress can be contractionary, since rigidities in the labour market may mean that it takes time for private-sector employment to expand to absorb the extra supply of workers.

Next, the financial savings from the reduction in public sector numbers [and/or the elimination/reduction of premium payments for some types of overtime] can be allocated in several ways:  (a) reduce the deficit; (b) increase the provision of public services [equivalently, avoid service reductions] ; (c) reduce taxes [equivalently, avoid tax increases beyond what is inevitable]; or (d) increase public sector pay levels [equivalently, partial or full restoration of previous pay cuts].

It is currently unclear about the intended allocation of savings across (a) through (d).

I further note that uncertainty in the provision of public services is damaging for the population, such that the commitment to avoid strike action and other types of service interruption is very welcome.

Finally, as part of the overall package, a commitment to no further pay reductions is also welcome by providing certainty to public sector workers  – this should reduce the level of excess precautionary savings. (I made this point back in January 2009 in my paper “A New Fiscal Strategy for Ireland”  –  the ideal time profile for pay cuts is to make a significant initial cut but not to pursue a sequential process of gradual pay cuts.) Since there are likely still significant pay premia for many public sector occupations, it will be important to closely monitor future public pay dynamics by reference to labour market conditions across the economy.

5 thoughts on “Macroeconomics of Public Sector Reform”

  1. The country has been round the block so many times in the last thirty years on public sector reform that another trip on that train is too jaded to be attractive. I hazard a polemical guess that the vast majority of civil service departments could remain open day and night and it wouldn’t make a jot of difference to businesses. I know the government and the unions are fond of quoting OECD figures that cast a favourable light on the numbers in the public service but these don’t rub up well against the experience of users of many public service systems. John Bryan the recently elected IFA President has pointed out several times that there are more agricultural staff supervising farmers than gardai per capita. If the objective of reform is to make the public service less attractive to work in compared to the private sector, salaries must come down. Public service salaries were built up on the back of the credit boom, a sad fact.

  2. Having been a regular reader of the site for a number of months now I have resisted the urge to comment.
    However, guess it is now time to make my first foray into a debate.
    Can I be the only one that feels a shudder of fear down my spine when I hear that the government and the unions have agreed a deal?
    Once I heard that unions had gone back into talks the worst fear had to be that a deal would be agreed as it can only mean that the government has caved in – all in the name of “social stability”.

  3. I seem to remember some interesting (and embarrassing) figures from the OECD’s review of the public service relating to:
    1) relatively low adoption of performance-related promotion
    2) very little horizontal movement in/out of the CS at the sort of senior grades that would attract skilled professionals.

    @Philip
    >> Since there are likely still significant pay premia for many public sector occupations, it will be important to closely monitor future public pay dynamics by reference to labour market conditions across the economy.

    How does that sit with your endorsement of the new floor on PS wages? Are we to accept that senior CS insiders, protected from the competitive labour market and facing no threat to their seniority from horizontal public/private mobility, deserve their premia seculo seculorum?!

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