Wage increase bill, confidence, and economic security for the people

In the Eurozone, the government wage bill accounts for almost a quarter of total government expenditure and about 10% of GDP, so it is important from a macroeconomic point of view[1].

In Albania, the government wage bill in 2023 accounts for 16% of total government spending and about 5% of GDP and is likely to reach one-fifth of total government spending and about 6% of GDP in 2024. GDP.

If we also add the expenditures that the government makes on itself and the properties it owns, then the current government is no longer considered a small government (that spends little on itself), but a big government[2].

Working for the government is now an even greater incentive than before, clearly, and openly challenging businesses, which to date cannot compete with the government.

But the risk of maintaining a better-quality administration and a more productive management turns into the biggest challenge of the public sector, since the phenomenon of promoting people without merit and wrong will further discourage talented people and especially professionals.

The latter will have to convert their only asset, professional integrity, with the exchange rate of the current policy much cheaper than before.

The content of the government’s wage bill is expected to play a role in the next episode of fiscal consolidation.

Actions on this front are part of broader policy packages that usually depend more on other fiscal instruments, such as public investments, social bills, etc.

However, changes in the government wage bill must be assessed against developments in the private sector.

Regarding wage policy, their growth for government employees was lower compared to the private sector in the period before and after the crisis, 2019-2020. But it is an important fact that the increase in private sector wages in these last three years was done when the latter was hit more severely and immediately by the economic recession of 2020, while the salaries of government employees did not have the problem of exposure to the crisis.

The recent measures to increase the costs of public wages were driven not by the demands of fiscal consolidation, but by a need to influence the qualitative growth of the administration, as an instrument that declares itself against the tendency and reasons for the corruption of the administration.

In the absence of consultations based on any public analysis, we think that these adjustments may bring more costs than benefits in terms of the quality of government employees, since the only main merit that the majority of managers and employees have is not professionalism. , but partisanship and adaptation to the spirit of cronyism.

It is true that well-designed government wage and employment policies and reforms can generate overall gains in the economy’s competitiveness and increase labor market efficiency. In times of fiscal stress, public employment adjustments can positively affect GDP and total employment in the economy, but only if there are large inefficiencies in the government sector.

From the reports of government institutions, it is not evident that the efficiency is low, even the digitization of services is counted as a helper in increasing the efficiency of public services.

It remains to be seen, then, whether public wage policy can have beneficial effects on competition by aiming to moderate economy-wide wages (through the “wage leadership” model).

While public sector demand is necessary in the current circumstances to support economic growth, historical experience shows that the process of recovering public investment in its own human resources must wait for good economic times to come. These times cannot be influenced by wage increases, but by various and numerous factors that are not yet connected with each other.

Moreover, given that Albania has recently started fiscal structural reform, oriented towards increasing efficiency in the public sector, it is expected that the moderation of public wages will support and help government policies to combat the risks that come from themselves (the change of often of policies).

Under certain macroeconomic and institutional conditions[3], a rationalization of government wages and employment policies can generate favorable effects on the labor market in the medium and long term through increased competition and efficiency.

Going forward, further adjustment of the government’s wage bill needs to be designed carefully and in relation to country-specific circumstances.

In countries with an effective democracy and an open and competitive market, it does not happen that the policy for such deep decisions is undertaken before the financiers of these decisions, the taxpayers, have been consulted.

Meanwhile, an increase in public wages in an environment with inflation still affecting the cost of living and businesses leads to larger and more persistent effects on the level of consumer prices in countries, since the size of the public sector has already become big. In this decision-making, where Albania already enters the category of countries with a larger public sector, it should be strengthened and increased as a platform, as well as the focus for public wage negotiations, aiming to set benchmarks for wage negotiations of the private sector.

Despite the direct adverse short-term fiscal effects there are benefits from the government’s wage bill reform that go beyond the objective of fiscal consolidation.

But can we have faith that what we express above will happen in the current context of the labor market and relations between the state, business, and the individual?

First, from the analyzes conducted in at least the last few years it is observed that two interrelated factors have contributed significantly to the volatility of trust, (a) economic uncertainty and (b) perceptions of weak or corrupt government performance.

Guaranteeing economic security is a key role of the state and its institutions and is the foundation of the social contract between the government and citizens. When economic uncertainty becomes widespread, trust in institutions can erode.

In all the calculations made, when people are more economically secure, namely the high- and middle-income groups, they report higher institutional trust than the rest of the population. Taking into account the challenges posed by the ongoing crisis of consumption of effective social policies for pensioners and the needy, as well as the increase of fiscal pressure and the distribution of public resources and the concentration of transactions of the economy in very few individuals and families, then this vicious circle between economic uncertainty and mistrust is likely to worsen in the coming years unless concerted action is taken as we and peer organizations have expressed on these acute social problems, but mainly for economic reasons.

Poor government performance, scandals and corruption have also undermined people’s confidence that public institutions are working for them and the country’s best interests. But just as the decline of institutional trust is a slow process, rebuilding it is a long-term goal. It will require sustainable and predictable public investment to narrow social, economic, and political divides. In the short term, concrete policy actions to expand social protection coverage could signal a strengthening of public confidence.

This policy would begin by at least fairly treating those traditionally marginalized or underserved groups to participate in the decisions that affect their lives, communicating regularly and in plain language the policies that guarantee their economic security. Emerging evidence suggests that the government’s use of social media to inform citizens and promote access to government services may have improved citizens’ perception of government transparency but has not resolved the issue of guaranteeing a dignified and normal life for them.

Second, referring to the analysis of IMF experts[4], “an increase in public wages leads to larger and more persistent effects on private wages in countries with higher union density and bargaining coverage and countries with a greater degree of centralization of wage negotiations. For example, a one percent increase in public wages in these countries increases average private wages by about 0.31 and 0.52 percent, respectively.
The effects in countries with lower union coverage and less centralized bargaining and bargaining are much smaller (about 0.13 and 25 percent, respectively) and less persistent.
Other conditions, such as the degree of overall price stability and the strength of the economy, may increase the size and persistence of the effects of public wage shocks on private wages.”

In the current context, if public sector wage negotiations are set as a benchmark for private sector negotiations, an increase in public wages can be expected to have greater impacts on private wages if, after engaging in in-depth studies and discussions with businesses, it is achieved that the increase in the cost of wages be negotiated with an alleviating policy applicable from the fiscal aspect, but also from the regulatory aspect with a medium-term sustainability.

However, when public sector activity complements private sector productivity (through the provision of collective goods) such policies would positively affect private employment only if they are intended to increase the efficient provision of these public goods.

The quality of public services matters for people’s engagement and trust in institutions, although levels of trust in institutions can also influence perceptions of the quality of services received.

[1] https://www.ecb.europa.eu/pub/pdf/scpops/ecbop176.en.pdf
[2] Big government is a negative term for a government or public sector that is considered excessively large or unconstitutionally involved in certain areas of public policy or the private sector.
[3] i.e. a budget performance as in 2022, but without benefiting from consumers’ pockets and inflation
[4] https://www.imf.org/-/media/Files/Publications/WP/2023/English/wpiea2023064-print-pdf.ashx