Nova workboard

a blog from young economists at Nova SBE

Is the program to reduce civil servants efficient?

One of the measures that the Portuguese government wants to implement is the reduction of the number of civil servants. To do so, it has created a program where workers can leave by mutual agreement, while receiving a monetary compensation for that (link here, in portuguese). The aim of this post is to discuss whether this program is an efficient way to reduce the number of civil servants.

To illustrate this program, a labour-leisure framework can be useful. In the following analysis, it is assumed that workers have the same preferences over Income and Leisure. All variables considered here should be interpreted as a present value of all their future amounts. This implies that, even if a worker expects not to work for some period after leaving the State – receiving, for instance, unemployment benefits – as long as he expects to start working after some time (e.g., when he stops receiving those benefits), this will be depicted in the graph as a positive amount of labour. Wage (ω) is used to represent not only nominal wage, but it also accounts for factors such as different uncertainty levels faced in the private – where workers that enter the program are expected to move – and public sectors. The current ω is denoted by ω S, while ωP stands for what workers expect to earn if they move to the private sector. This ωP  varies among workers, such that ωPH > ωPL. Furthermore, ωS > ωp : ωp  is the opportunity cost of working for the state so,  if it was larger than ωs, civil servants would leave voluntarily, turning this measure unnecessary.

Graphically:

Image

If a worker starts at A, leaving his job without compensation leaves him at a point like B (if H type), where he is worse-off. For him to be willing to accept this change, he must receive a compensation that makes him at least as well-off as before. This amount is given by the compensating variation (CV), D – IH and C – IL in the figure, for the different types of workers, that will end at a point like FH or FL. One important aspect here is to note that, the higher ωP  is, the smaller the compensation required. This means that, for any given compensation level the government decides, the workers that are going to leave their jobs are the ones valuing their current job less, relatively to the alternatives. In this sense, this measure maximizes the total welfare of civil servants, when compared with other ways of reducing their number. This happens because, with this mechanism, workers more willing to leave the State are the ones who will while, for instance, if it was the government to decide who would leave, this might not verify.

A possible drawback of this approach, from the point of view of the public services, is that, if the valuation workers make of their alternatives increases with their productivity, i.e., the best workers expect to earn more at a new job, this process may have the effect of making the most productive workers leave, worsening the quality of the public sector.

In sum, it is possible to analyse and compare several ways for the government to reduce employment – leaving aside the debate on whether this is optimal – and see that the current program of mutual agreement rescission may be the most favourable for the workers, since those who will stay in the State are those who value it more.

João Araújo, no. 638

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Author: studentnovasbe

Master student in Nova Sbe

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