Developing an employment model that works

This article appeared originally in Gulf News: link to the original article

I have always wondered on how involved a government should be in the jobs market. Should it recruit all of the excess job seekers that the private sector, for one reason or another, could not, or just did not, recruit?

Most importantly, can the government do so without being extremely inefficient and hindering its own operations and services for the sake of doing so? What about the huge wage bill that comes with that? What about pension?

Well, speaking of pension, this might be why basic salaries, along with whatever is included in pension contribution, are the lower proportion of the total salary. Once all of the above is considered, how can it be addressed in terms of countries with income taxes?

Not only that, but can a very high increase in income taxes fix the inefficiency in government recruitment if imposed on public sector employees only? Can it fix government pay, which cannot go up if you are doing 30-40 per cent of labour force recruitment like in Egypt?

That, of course, comes with a hefty wage bill that equals 26 per cent of total government expenditure as documented in a research by Kamal El-Wassal, Assistant Professor in the Department of Economics, Faculty of Commerce, University of Alexandria.

For the sake of clarification, representing 30-40 per cent of overall recruitment is not necessarily inefficient or bad. But then it’s all relatively speaking in terms of how big the labour force is.

That is, what if a government recruits the same 30 per cent that Egypt has, but from a much smaller labour force than Egypt’s? For instance, and based on OECD’s 2011 figures; Denmark, Sweden, and Finland have government employment rates of the labour force at 28.7, 26.2 and 22.9 per cent respectively.

Before making any quick judgements, let’s also consider the labour force numbers. In Egypt, the labour force stands at about 27.69 million, according to CIA Fact Book. For Denmark, Sweden, and Finland, the numbers are 2.68 million, 5.1 million and 2.79 million respectively.

The comparison is unfair, but these governments could have recruited everyone and completely sidelined the private sector, which already is the case in sectors like education and health care. That is because efficient government services are in such a way that companies in the private sector cannot not compete with how efficient the public sector is.

Again, governments shouldn’t create more jobs than it needs to fix unemployment. Governments are required to create the right investment environment through its policies, and that is that. If excessive government recruitment works now, it cannot be sustained.

Not only that, but governments are normally stuck with a trade-off between recruiting more, and raising the pay of existing ones. And if you are recruiting some 8 million people, I do not think you can pay them well.

In Singapore, let’s say, the government employs 6.35 per cent from a labour force of 3.44 million. The labour force is too low, even lower than that of Nordic countries, but then Singapore pays the highest salaries that any government pays its employees. That is worldwide by the way.

Ministers in Singapore make more than $1 million a year, and that also adds up to very generous pensions that they receive in the future. So no, there is no hidden trick there on increasing all other allowances that do not add up to the pension.

According to Melbourne Mercer Global Pension Index, prepared by Australian Centre for Financial Studies, Singapore is among the top 10 countries with the best pensions worldwide. Not surprisingly, all Nordic countries mentioned above are in the same with Denmark topping the list. The evaluation is based on three main pillars — adequacy, sustainability, and integrity.

The comparison provided earlier is not between a country and another, neither is it to undermine the processes of one when benchmarked with another. As a matter of fact, the comparison is only between efficient government recruitment and an inefficient one.

So now, can a government modify its recruitment and get it into the same category as Singapore and the Nordic countries? To simplify, the solution can be broken down in a few steps that would need to be taken.

The first step to be implemented right away is to halt any further government recruitment if the level is already alarming. To highlight what an alarming level is and flag it, a government might want to assess all outstanding organisational structures of its entities.

With the head of the pyramid in each taking the lead in doing so, the process will identify clearly the posts that were created for no good reason — repetitive job descriptions, generic tasks, lack of systems and increased manual work, as well as floaters who no multinational organisations would want to recruit or have on their payroll.

If such posts exist, that’s the first sign to stop any further recruitment in the assessed entity. Another sign to look for is government pay. Can we reduce the numbers but pump up the salaries to levels that can almost match those of the private sector?

Then, channelling government funds into the training of excess employees will ensure them a fair chance in the highly competitive private sectors.

The second step is to raise the bar of entry requirements to the public sector. A late US president stated that the government recruits those that are left out by the private sector. Not entirely true, but if it’s too easy to get and keep a government post than is the case in a commercial entity focused on profitability, then that’s where you go.

This step probably compliments part of the first one. Raising the bar does not only mean entry exams in different fields to test different set of skills that the post requires, but connecting to a good pay that justifies such measures. A very good pay will also mean having a very good pension in the future.

The third step would be to encourage private sector investments. Foreign direct investment into Singapore amounted to more than $63 billion in 2013, while the same was around $5.5 billion in Egypt (World Bank). This will mean encouraging and facilitating the signing of important agreements such as avoidance of double taxation and protection of investments to facilitate the entry of foreign companies.

The fourth, and last step and which is a bit peculiar when compared to the preceding three, is to look at income taxes and consider modifications. For instance, why not differentiate the income tax for public sector employees and raise it?

Speaking of which, Finland, Sweden, and Denmark are among the top 5 countries where income taxes are the highest. A specific modification will be to increase tax rates on the income of government employees. Also, it might be reasonable to consider increasing the contribution of a government employee to the pension fund versus that of the government.

If government salaries increase public debt, and its increasing pension contribution adds up to pension funds being underfunded, then what is another way to do so except by shifting the contribution percentages? That might be a better solution in the long-run than increasing public debt or tapping into Sovereign Wealth Funds.

So instead of just introducing a quick fix to government recruitment, lay down the basis for future pension fixes.

To conclude, let’s first emphasise that governments are not supposed to fix unemployment through direct recruitment, but rather through other policies that encourage business activities and recruitment. Moreover, a government’s role is also to better understand the needs of jobseekers, their qualifications, and how to better allocate them to different posts.

With more careful recruitment, a government would be able to raise salaries and engage the private sector in a healthy competition to recruit talents. In the Global Competitiveness Index Report published by the World Bank for 2014, Singapore came second for a third consecutive year.

Finland came in third, Sweden sixth, and Denmark was ranked 15th. Even though the report might be too diversified away from how efficient government recruitment is, it does evaluate many other factors that are the results of a more efficient government in all aspects.

And when you see the same countries topping almost any list compiled by different international entities and research centers, and in many different fields that are at least not directly related or correlated, it sends a clear message of how to do things right. The last thought that I want to leave you with is this: what are the other issues from excessive and unnecessary government recruitment?

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