Do Government Wage Cuts Close Budget Deficits? a Conceptual Framework for Developing Countries and Transition Economies

International Monetary Fund

No 1996/019, IMF Working Papers from International Monetary Fund

Abstract: Real wage declines have been common in the public sector in many countries over substantial periods of time. In several cases, such wage reductions have coincided with a decline in the efficiency of the public sector. In a simple analytical framework, it is shown that higher wage levels alter the incentive compatible equilibrium by attracting relatively skilled human capital to the government sector, which raises the quality of public output--tax revenue collection in this paper. Increases in wages should be complemented with appropriate monitoring and penalty rates for effective tax administration; prescriptions of raising the statutory tax rate alone, however, may not increase revenue collection.

Keywords: WP; private sector; government wage cut; government wage policy; government pay-scale; wage rate; government wages low; employees well; Public sector wages; Tax evasion; Corruption; Wages; Real wages; Eastern Europe; Africa (search for similar items in EconPapers)
Pages: 40
Date: 1996-02-01
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Citations: View citations in EconPapers (6)

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