Macedonia Pay & Employment Modeling

Wage Bill Reduction Simulation Model Purpose Inter-budget user wage bill reduction prioritization Budget user-specific employment reduction targeting Inter-budget user wage bill reduction prioritization: Assist the central authorities (i.e., Ministry of Finance) of the Government of Macedonia in prioritizing and setting realistic targets for net wage bill savings. Budget user-specific employment reduction targeting: Assist individual Budget Users (BU’s) in sensibly targeting any employment reductions they would need to undertake as part of this effort.

Summary of Model Central authorities triage budget users. Model determines wage bill percentage reductions required for each group of budget users required to meet pre-specified overall wage bill reduction target. Budget users decide where and when to cut staff required to meet their assigned wage bill reduction targets. Model predicts fiscal impacts, by BU and year, including NPV.

What the model showed Budget User implications: Net savings are sensitive to seniority and months of contributions to the employment system. Potential for wage bill savings: Employment reductions can readily yield net budget cost increases during and immediately following the period in which employment reductions are accomplished, while yielding positive NPV only after about five years. Government policy implications: The Government could increase net savings by revising the country’s severance payment and unemployment compensation policies. Budget User implications: Net savings are sensitive to seniority and months of contributions to the employment system. Budget Users can increase net savings by targeting employment reductions among staff with less seniority and shorter employment histories (i.e., fewer months of contributions to the employment system). Potential for wage bill savings: Given the generosity of the current combination of severance and unemployment compensation policies, employment reductions can readily yield net budget cost increases during and immediately following the period in which employment reductions are accomplished. The simulations for the Education sector suggest that under the employment reductions proposed by the PEIR mission, the present value of net savings would be negative for about five years, despite the fact that all costs would be incurred only during the first fifteen months after employment reductions actually occur, and monthly net cash flow savings would be positive the month after which employment reductions ceased. At the same time, the medium and longer term net savings are strongly positive in present value terms Government policy implications: The Government could increase net savings achievable through employment reductions aimed at reducing inefficient over-employment in the public sector by revising the country’s severance payment and unemployment compensation policies governing the public sector

What happened in Macedonia? Ministry of Finance was intrigued, but was unwilling to use model to target employment reductions. Ministry of Finance decided, instead, to convert certain functions from public administration functions to contracted functions and make all decisions itself.

Civil Service Salary Scale Model Purpose Predict fiscal impacts of implementing new Civil Service salary scale mandated by Civil Service Law

Story of model development and use CS Law mandated complicated salary structure Position-specific impacts were unclear Overall fiscal impacts were unclear Model made all fiscal impacts clear Allowed Ministry of Finance to: Use pay and employment database they developed Notice unanticipated impacts of CS Law salary scale implementation. “Hold harmless” CS Law provision Pattern of point changes across positions

Results? Ministry of Finance team decided to model individual salary changes, rather than averages. Government revised CS Law to eliminate “hold harmless” provision. Government decided to review the salary structure mandated by the CS Law.

Development costs of these models P&E model: developed during two-week PEIR mission Civil Service salary scale model: developed during two-week lending operation mission and revised during subsequent missions