The Complicated Relationship between Public Sector Employment and Governance in Low-Income Countries

Many empirical and theoretical researchers focus on studying the relationship between governance and sustainable development by looking at the way in which governments are selected and held accountable, implement policies, and respect their citizens. According to the Worldwide Governance Indicators (WGI), low-income countries rank much worse on indicators of governance effectiveness, rule of law, and control of corruption when compared with OECD countries.

Most previous research on governance and development has focused on analyzing macro-level determinants of governance, such as economic performance, structure of institutions, unemployment, and budget deficit. Departing from this paradigm, a new study from NBER researchers Frederico Finan, Benjamin Olken and Rohini Pande takes a closer look at the internal mechanics of the government. The authors draw from a subfield of labor economics called personnel economics to explore the design of personnel policies, such as selection, recruitment, monitoring, and incentives for public sector employees.

The researchers posit that effectively managing employees and altering human resources practices could improve the institutional structure of the public sector. This in turn could impact the quality of governance overall, especially for low-income countries that, on average, rank below OECD countries based on WGI.

Using household surveys from 29 middle- and low-income countries and three high-income countries—the UK, US, and South Korea—the authors evaluate the relationship between working in the public sector and higher wages. For the high-income countries, there is no strong relationship between working in the public sector and higher wages—one usually thinks of public sector employees as being low paid and private sector employees as making more money. However, in lower income countries, the relationship between working in the public sector and earning higher wages is very pronounced.

To complement this analysis, the authors review evidence from field experiments that use different incentive schemes to attract public sector employees and examine whether these incentives improve worker performance. Studies show that financial incentives play a role in attracting more educated candidates to an applicant pool, but more educated candidates are not necessarily the most suitable candidates for public service careers. For example, one paper finds evidence that higher salaries might actually discourage pro-social applicants—people with stronger preferences for helping and caring for others—from applying.

When the researchers compare private and public sector employees with similar job functions, public sector employees are on average 20 percent more likely to receive health insurance relative to their private sector peers. Likewise, the evidence shows that, in poorer countries, the public sector hires more educated employees relative to the private sector, and, in addition, public sector employees report higher tenures in job positions. So, public servants in lower income countries are more educated and better compensated than private sector employees with the same general types of jobs.

This result is striking when you consider that poorer countries are more likely to have a lower quality of governance. In one frame of thinking, higher wages for public servants in these countries could serve as a sign of corruption and nepotism. However, the authors interpret these results primarily as evidence that higher wages, despite being high, are not enough of an incentive to improve the performance of public sector employees in these countries.

Instead, researchers promote the idea that a different framework for personnel policies could improve the quality of governance. In particular, the public sector could improve its screening and monitoring mechanisms in these lower income countries to track whether or not highly paid employees are really worth their salaries. If, as research indicates, higher financial incentives are discouraging pro-social applicants from applying, more research should be conducted on how best to attract high quality candidates. There is also speculation that better technology and e-governance platforms could be positive steps toward being able to better motivate public sector employees and improve accountability.

Policymakers face the challenge of creating well designed incentive schemes to attract and retain the most qualified employees. Enhancing personnel policies could be an important component in helping bring about better governance in countries around the world.

Article Source: Finan, Frederico, Benjamin A. Olken, and Rohini Pande. “The Personnel Economics of the State.” National Bureau of Economic Research, 2015.

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