Key message 1 – Key differences between the public and private sectors pose unique challenges for improving government worker performance.

 
There are several ways that employment and personnel practices in the public sector typically differ from those in the private sector due to
the nature of the government’s objectives (Dixit, 2002; Finan et al., 2015). These features need to be considered when designing and implementing effective policies for recruiting and motivating  government workers.1

First, the public sector has limited capability to offer employees certain types of benefits that private companies can offer, such as shareholdings to incentivise managers to maximise company  performance. This also means that politicians and civil servants are less likely to be directly affected by poor performance, compared to managers who may experience financial losses from  inefficiencies.

Second, governments often have rigid rules that restrict hiring and firing of civil servants. Civil service systems often use strict formulas that define criteria for hiring, compensation, and  promotion compared to the private sector where there is usually more flexibility. These rules have often been designed  to prevent politicians from exerting undue influence over civil servants, but they also tend to  limit the government’s ability to incentivise performance.

Third, the fact that public sector organisations serve societal needs may draw different types of  individuals into the public sector compared to the private sector, so it can be useful for  personnel policies to take this into account. In particular, if these individuals are sufficiently motivated to work to the best of their abilities, offering performance pay will increase the  government’s bill without improving performance.

Finally, public sector organisations often face limited competition in the services provided. Public services like health and education are often heavily subsidised and face limited competition  from other providers. This lack of competition may translate into less pressure on employees and a greater need for monitoring as compared to the private sector, where competition helps to incentivise productivity and reduce inefficiency. While all the issues above may present some challenges for employee recruitment and management, with adequate attention, they need not inevitably limit public sector performance.

Interestingly, government workers in developing countries are usually paid much better than their private sector counterparts, but restrictive hiring, firing, and promotion rules often weaken performance. Figure 1 compares average wages of public and private sector employees in 39 countries using household survey data (Finan et al., 2015). In most countries, average salaries in the public sector are higher than in the private sector –and the pay gap is largest in poor countries where public sector workers earn more than twice as much as their  private sector counterparts. After controlling for other factors such as location, age, and  education, the public sector wage premium disappears for developed countries but remains significant for the poorest countries. Overall, the evidence suggests that poor government performance in developing countries is not simply due to government workers being underpaid.

Figure 1

Finan et al., 2015

Footnotes

  • 1 This section is based on Finan et al. (2015). Our brief builds upon existing reviews (See Finan et al. (2015); Dal Bo et al. (2016)).