Do we (need to) overpay public servants?

Abstract

The labour market is constantly subject to economic, socio-demographic and technological developments. As both a policymaker and employer, the Dutch government must respond to these developments. As a policymaker to promote the functioning of the labour market, and as an employer to attract sufficient qualified personnel to guarantee the provision of public services to Dutch society. Both goals are under considerable pressure due to an unprecedentedly tight labour market, leading to labour shortages in parts of the public sector. These shortages have far-reaching consequences for the functioning of the Dutch labour market and the ability to provide public services, such as the provision of care and the renewal of crucial IT systems.

The Dutch government is pursuing a labour market policy to combat these developments and mitigate negative effects. The Dutch public wage policy, determining an adequate level of public sector wages relative to private sector wages, constitutes an important aspect. The Dutch public wage policy intends to offer competitive wages in the public sector to attract sufficiently qualified personnel to provide public services. The government has the reference model in place for this, but there is limited knowledge of to what extent the reference model leads to competitive wages in reality. This study addresses this knowledge gap and, as the first quantitative evaluation of the Dutch reference model, looks at the research question:

How does the Dutch public wage policy translate into public-private wage differentials and sectoral shifts?

An answer to this research question is sought by means of empirical econometric analysis, coupled with a thorough theoretical foundation. Oaxaca-Blinder decomposition methods, adapted to the specifics of the Dutch labour market, have been applied to analyse the public-private wage differentials to assess the competitiveness of public sector wages. Correlation analysis is applied to analyse the relationship between these wage gap estimates and sectoral job mobility to assess the influence of public-private wage differentials on the ability to attract qualified personnel in the public sector. Together, this forms an evaluation of the reference model, and thus the current public wage policy, addressing the questions of whether public sector wages are competitive with private sector wages and whether this (non)competitiveness can be a cause of shortages in the public sector.

The findings indicate that the current public wage policy does not lead to competitive public wages. While wages are reasonably competitive for the weighted average public servant, this is not the case when looking at specific personal human capital characteristics. Depending on one's capacities, one earns relatively more or less in the public sector than in the private sector. The reference model is too generic to be competitive for individuals and is only reasonably competitive when looking at the average. Application of compensation policies, as was done in 2015 and 2016, leads to a serious deterioration of public sector competitiveness. It is also established that these considerable wage differences can be a cause of shortages of qualified personnel in the public sector, including healthcare and ICT personnel.

The Dutch government should ask itself whether it wants to offer these non-competitive wages. There are egalitarian reasons for this approach, but there is a risk that there will be shortages of qualified personnel in the public sector. To respond to this, the reference model should be examined more closely, other options for attracting sufficient personnel in the public sector should be investigated, and options for increasing productivity in the public sector should be investigated. Academic points for future research are to apply other methods to the rich data set used in this study and to conduct further research into the causality between wages and sectoral job mobility, also in relation to other Public Service Motivation (PSM) and intrinsic motives.