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

Publication Date:

February 1, 1996

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 1996/019

Subject:

Corruption Crime Labor Public sector wages Real wages Revenue administration Tax evasion Wages

English

Publication Date:

February 1, 1996

ISBN/ISSN:

9781451922554/1018-5941

Stock No:

WPIEA0191996

Pages:

40

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