Tuesday, August 07, 2012

How Much is Public-Sector Tenure Costing Greece?

The Greek government continues its search for €11.6 billion in spending cuts; yet, it has made clear so far that laying off public sector employees is off the table. This is a pity: spreading the pain evenly between the private and the public sector is the best decision that the government could make. Besides boosting its credibility with Greeks who feel they are being suffocated to pay for generous state wages, this decision would yield enormous economic gains. Consider the following table.

Admittedly, the data on the Greek public sector remains opaque. But the European Commission, in its review of Greece’s second program, published a table showing public sector employees at year-end 2009 and 2010 and for November 2011 (see here, p. 24). To take the data through December 2011, I have relied on numbers published by the Ministry of Administrative Reform (here). The data shows that public sector employment shrank by some 56,000 from 2009 to 2011, a 7.8% drop (Line 1).

At the same time, from Q4 2009 to Q4 2011, total employment in Greece dropped by 544,000, a 12.2% decline (Line 2, sourced from here). If we subtract public sector employment from total employment, we can conclude that the private sector has been hit disproportionately with a -13% drop in employment. On top of fewer jobs are also lower labor costs, which have fallen considerably by 18.5% (Lines 4 and 5, sourced from here).

At the same time, the Greek government has managed to reduce its wage bill by almost 15.9% from €31 billion to €26 billion (Line 6, sourced from Eurostat). Given that part of the drop came from employing fewer people, the cost per worker only fell by 8.8% (Line 7). But had public sector costs fallen by the same amount as the rest of the economy (18.5%), the wage bill per person would have been almost €4,000 lower.

If we put these two pieces together, we can estimate that if the number of public sector employees had declined by the same amount as private sector employees, the wage bill would have fallen by 19.9%, given the (actual) drop in wages for the public sector. But if wages had fallen further, in line with the economy as a whole, the government’s wage burden would have shrunk by 28.4%.

In other words, if the public sector had suffered in a similar way as the private sector, the government would have spent €3.9 billion less in 2011 (€22.2 billion versus €26.1 billion actually disbursed). Given that Greece had a primary deficit of €4.6 billion, the government would have almost run a primary surplus in 2011! Another way to think about this is that the increase in indirect taxes (VAT, gasoline, etc.) has produced a net gain of about €2.3 billion from 2009 to 2011 (calculated as the delta between real revenues in 2011 vs. revenues if the ratio of indirect taxes to GDP had remained at its 2009 level – effectively estimating that the new measures prevented indirect taxes from falling in line with GDP as happened with direct taxes). Greece could revert back to pre-crisis tax levels and still come out ahead.

These are huge stakes, and all that they require is that pain is evenly split. No need to wipe out the public sector, just to treat public sector employees like everyone else. Greece would be running primary surpluses if the government could confront public sector employees. And Greeks would see a big spike in their disposable income from lower taxes. So much that can be accomplished with such a simple policy of political courage.