Can the increase in civil servant salaries boost economic growth?

Is the increase in public sector wages from 8 to 15% as of November this year (the average increase will be about 9.5%)  an economically responsible move of the government and will it bring positive or negative consequences?

The International Monetary Fund, but above all the Fiscal Council, has criticised such an increase in wages because it amounts to almost double the nominal growth of gross domestic product (estimated at around 5.5% this year). The problem is not only the wage growth in 2020 but the fact that in the previous year the same growth in the public sector was significantly higher than the GDP increase.

The consequences could be a disruption in the macroeconomic balance, if an external shock were to occur, similar to what happened in 2008 when pensions rose irrationally and excessively, followed by a severe recession the following year. Miladin Kovacevic, Director of the State Statistics Office, says that wage increases are a responsible economic measure, even if wages increase faster than GDP because the decision takes place in the light of a decline in public debt.

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“Thus public sector wage growth supports GDP growth and has a demonstrative effect on private sector wages. We can expect wages to rise in the private sector in a month or two. This will help to increase GDP and budget revenues. Wages cannot only be viewed in correlation with the GDP growth,” said Kovacevic, adding that the increase in wages would prevent workers from leaving the public service.

Other economists disagree with Kovacevic’s statement. Milojko Arsic, a professor at the Faculty of Economics, says that empirical research does not confirm these effects.

“In Central and Eastern European countries, over the last 20 years, wage growth in the public sector has influenced the increase in the external trade deficit, but has had little effect on inflation and GDP. Private sector wages are more affected by the labour market situation, i.e. the brain drain. We have a similar situation here, in the countries of the EEC region, where total wages are growing faster than GDP. However, at the beginning of the said trend, these countries had a surplus in the external trade balance, while we, on the other hand, have a deficit”, explains Arsic.

Not all wage increases in the private sector are good for the economy. According to Arsic, if there is no productivity growth to back it up, there is no sustainable wage growth.

“This year, salaries in the private sector are growing faster than in the public sector. We will have a GDP growth of 3% and wages will increase annually by 7.8%. This means that the international competitiveness of our economy will be reduced. Private sector wages are the most important indicator of international competitiveness. This policy will only lead to a growing external deficit,” warns Arsic, adding that if it was that easy to increase GDP by raising public sector wages, anyone would do it.

“Indeed, economic activity grows the basis of investments, not consumption. Investments are refraining to spend more now in order to spend more in the future. That’s why many people have difficulty deciding to invest,” notes Arsic.

Economist Dragovan Milicevic believes that wage increases in the public sector do not affect wage increases in the private sector because of the minimum wage and unemployment.

“Salaries in the public sector are one thing and salaries in the private sector are another. An employer can pay whatever he wants if there is a surplus of labour supply, and unemployment is still high in our country. Our growth is mainly influenced by the growth of consumption and exports. And our consumption has not increased in years. The question remains into what the wage growth spills over. Perhaps into paying loans, utility services, interests…”, said Milicevic, adding that, from 2012 to 2017, wages have been reduced by 36% in real terms.

(Danas, 28.10.2019)

This post is also available in: Italiano

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